BSP drafts rules for national payment system’s clearing switch operations

THE BANGKO SENTRAL ng Pilipinas (BSP) is looking to create a framework for clearing switch operations within the national payment system to ensure quick and affordable transactions.

In a draft circular posted on its website, the central bank said the framework will work to “ensure efficiency of clearing switch operations within the national payment system, particularly the automated clearing houses (ACH) under the National Retail Payment System (NRPS).”

If approved, the framework will insert additional sections in the Manual of Regulations for Payment Systems (MORPS).

The proposed framework details principles on the efficiency of clearing switch operations, including the responsibilities of operators.

“Efficiency is characterized by the presence of quick and affordable payment means which are fit for the purpose of the transactions and the needs of the users and the participants,” the BSP said.

Clearing switch operators (CSOs) are required to “design and implement effective and sound governance, including management of significant risks, such as but not limited to fragmentation, liquidity, credit, operational, settlement, and general business risks.”

They must also provide reliable and consistent service availability with prompt issue resolution; enable fair and open access of participating institutions to the system; and facilitate and promote interoperability among participating institutions, among others.

Operators must also adopt “equitable and transparent” pricing for participating institutions. Pricing mechanisms will be made available for review and evaluation of the BSP, it added.

The rules require operators to observe guidelines on governance and risk management, interoperability, reliability, safety, transparency and accountability, access, pricing, and end-user protection.

For example, CSOs must notify the appropriate supervising department of the BSP, and the participating institutions on the occurrence of scheduled and unscheduled downtime.

Also, the guidelines detail the selection process and criteria for CSOs.

“Prior to the evaluation of a prospective CSO, the prospective CSO must submit its intent to provide clearing switch services to the ACH participant group,” it said.

“At least two ACH participants must formally signify their intent to engage the services of the CSO to the ACH participant group, including submission of any relevant factual information about the eligibility of the CSO.”

Under the draft rules, CSOs must also undergo an operational qualification stage (OQS) to “further substantiate the prospective CSO’s technical expertise and capability.”

This process will be supervised by the BSP. The OQS will have a testing, staging and production environment phase.

“This staged approach manages the potential impact of the OQS on live environments,” it added.

Operators must be able to demonstrate clearing switch and on-boarding price, system and service response time, availability and resiliency across all phases of the OQS.

They must also provide documentation on their overall timeline and budget; key performance indicators and testing performance metrics; testing methodologies; minimum safeguards and testing deliverables.

“Following the OQS, a thorough assessment of the prospective CSO’s technical expertise and capability will be conducted. The eligible CSO will then prepare a final report detailing the end-to-end results of the OQS and the proposed exit scenario.”

“Subject to prior approval of the Bangko Sentral, eligible CSOs whose clearing operations are assessed as successful through the OQS and whose clearing operations are deemed consistent with the key principles outlined in this Section shall be issued an authority to operate as a CSO of an ACH under the NRPS.”

Qualified CSOs may begin operations upon approval by the BSP and after they accomplish the necessary agreements with the ACH they seeks to provide with its services.

The BSP also outlined the process for observed inefficiencies in clearing switch operations.

“The Bangko Sentral, subject to Monetary Board approval, may authorize the entry of new CSOs to an ACH to address concerns on reliability and efficiency of clearing operations,” it added.

“With adequate safeguards to manage fragmentation and interoperability, the entry of a new CSO to an ACH is envisioned to promote healthy competition among the participating CSOs to achieve efficiency.”

For example, the central bank prohibits any arrangements restricting direct clearing participants to engage the services of only one CSO. It also requires new and existing CSOs to establish interconnections with each other, as applicable.

“The Monetary Board may limit the total number of CSOs that may be given authority, taking into account the total number of applications received and the assessment of the national payment system landscape. The appropriate supervising department of the Bangko Sentral will continuously monitor the payment system for any inefficiencies.”

“Upon determination by the Bangko Sentral that the observed inefficiencies on clearing switch operations were addressed, the Bangko Sentral, through the Monetary Board, may cease authorizing new CSOs.” — Luisa Maria Jacinta C. Jocson