The 2008 Financial Stability and Payment Systems report by the central bank of Malaysia, the Bank Negara Malaysia (BNM), classifies the Real Time Transfer of Funds and Securities (RENTAS) system as the systemically important payment system in Malaysia. The 2008 BNM report also refers to a 2007 self-assessment of the RENTAS system conducted against the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). The report provides a snapshot of the 2007 self-assessment, in which it shows that RENTAS fully observes five of the ten CPSIPS, and it broadly observes four. Core Principle V is "not applicable" since RENTAS is a real time gross settlement system. Similarly, the BNM broadly observes two of the CPSS' principles on central bank responsibilities, and broadly observes one. One category, namely, the central bank responsibility on the oversight of non-central bank systems is not applicable to the BNM. The 2008 BNM report also observes that the 2007 self-assessment concluded that the RENTAS system continued to exhibit a high level of robustness and came close to fully observing the international standards. However, the 2007 self-assessment itself is not publicly available.

General Overview

Bank Negara Malaysia (BNM), the central bank of the country in a report titled "Financial Stability and Payment Systems Report 2007" (hereafter referred to as the 2008 BNM report) explicitly classifies the Real Time Transfer of Funds and Securities (RENTAS) system as a systemically important payment system. In addition, the 2008 BNM report refers to a 2007 self-assessment of the RENTAS system conducted against the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). Specifically, the report provides a snapshot of the 2007 self-assessment, in which it shows that RENTAS fully observes five of the ten CPSIPS, and it broadly observes four. Core Principle V is "not applicable" since RENTAS is a real time gross settlement system. Similarly, the BNM broadly observes two of the CPSS' principles on central bank responsibilities, and broadly observes one.

According to the BNM's 2004 and 2005 annual reports, the other main systems operating in the country are the Sistem Penjelasan Imej Cek Kebangsaan (SPICK), which is a check clearing system; the Inter-bank Giro (IBG) system, operated by the Malaysian Electronic Payment System (MEPS), is a retail payment system; and the Financial Process Exchange (FPX) system, which was introduced in October 2004 as an internet-based payment system that allows participants such as corporations to make payments electronically. The RENTAS system is owned and operated by the BNM and is designated for oversight by the BNM under the Payment Systems Act of 2003. RENTAS, which was implemented in July 1999, replaced the previous end-of-day net settlement system, Sistem Penjelasan Elektronik Dana dan Sekuriti (SPEEDS). It consists of two sub-systems, the Inter-bank Funds Transfer System (IFTS) and the Scripless Securities Trading System (SSTS). More than 90% of total non-cash payments in 2007 valued at Ringgit Malaysia (RM)29.9 trillion were routed through RENTAS. On average, RENTAS handled RM124.5 billion in payment transactions daily in 2007, an increase of 23.6% compared to 2006.

According to the 2008 BNM report, RENTAS has a well-founded legal basis under all relevant jurisdictions. Specifically, the BNM's oversight responsibilities for the payment and settlement systems in the country are drawn from the Payment Systems Act of 2003, and the Central Bank of Malaysia Act 1958 (revised in 1994) requires the BNM to promote the reliable, efficient and smooth operation of national payment and settlement systems. The BNM report states that RENTAS has clearly defined procedures for the management of credit risks and liquidity risks, adding that the "oversight activities undertaken by the bank in 2007 were centered on reducing overall risks in the payment system" (2008, p. 109). For example, in November 2006, the BNM introduced the Payment versus Payment (PvP) system for the settlement of inter-bank ringgit/US dollar foreign exchange (FX) trades through RENTAS. The PvP infrastructure permits the simultaneous settlement of ringgit in Malaysia and US dollars in Hong Kong, thus eliminating FX settlement risk. Also, in October 2007, the BNM launched the Delivery versus Payment (DvP) settlement service for US dollar securities issued, deposited and traded in Malaysia. The DvP ensures that the delivery of Malaysian-issued US dollar securities deposited with RENTAS are made simultaneously with its corresponding US dollar payment, thus removing the settlement risk associated with the trading of such securities in Malaysia. The BNM report notes that "the RENTAS system has achieved its objective of mitigating settlement risk by providing participants with a means of settling payment obligations in real time with finality" (2008, p. 112).

The 2008 BNM report observes that RENTAS has a high degree of security and operational reliability and has contingency arrangements for timely completion of daily processing. To ensure this, the BNM regularly organizes the "testing of business continuity arrangements on a coordinated basis involving the user community [which] serves to reinforce the robustness and resilience of the systemically important payment system" (p. 112). The BNM also manages, in tandem with each RENTAS participant, complex contingency arrangements for timely completion of daily processing. Perhaps the most important of these contingency setups are the RENTAS Disaster Recovery Centre (DRC) sites. Each RENTAS participant is required to operate a DRC and conduct live runs from their DRC sites at least four times a year. Also, the BNM's contingency site is always in a "hot standby" mode, which basically allows processing to resume in a few hours in the event of a breakdown.

To augment efficiency, the BNM introduced a fully image-based check-clearing process called the Cheque Truncation and Conversion System (CTCS) or eSPICK, which allows the clearing of checks to be done through truncation or conversion modes, hence eliminating the physical movement of checks once deposited at the collecting banks. The eSPICK is expected to reduce the risks and costs associated with the physical handling of checks and also improve the efficiency of the overall check-clearing process.

The 2002 "Financial Markets and Payment Systems in EMEAP Economies" report of the Executives' Meetings of East Asia-Pacific Central Banks and Monetary Authorities (EMEAP) notes all financial institutions licensed under the Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983 (IBA) or any other institutions approved by BNM may participate in the RENTAS system. This information is also posted on the BNM's website. Regarding RENTAS' governance arrangements, the EMEAP report and the BNM website states that RENTAS is governed by the RENTAS Participation Rules and RENTAS Members Rules, which were formulated by the BNM in collaboration with commercial banks after a comprehensive consultation process undertaken with all stakeholders.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

EN

According to the BNM's 2008 report, Malaysia fully observes this principle, and a sound regulatory framework exists to govern payment systems in Malaysia. The 2008 BNM report notes that the central bank's oversight responsibilities for the payment and settlement systems in the country are drawn from the Payment Systems Act of 2003. Furthermore, Part 2 Section 4 of the 1958 Central Bank of Malaysia Act (revised in 1994) mandates the BNM "to promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia." The other main legislation governing payment systems in Malaysia are the Banking and Financial Institutions Act of 1989, which requires any person who intends to operate an electronic funds transfer system to obtain BNM approval, and the Bills of Exchange Act of 1949, which, along with the Contract Act of 1950, provides a comprehensive legal provision for the usage of paper-based checks and other bills of exchange. The BNM is the operator of Malaysia's Real-time Electronic Transfer of Funds and Securities (RENTAS), and all laws, regulations and procedures governing RENTAS operations are comprehensive, reliable, public and accessible. According to the 2008 BNM report, the central bank "places great importance in ensuring its adherence to international best practices" (BNM 2008, p. 109).

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

EN

According to the BNM's 2008 report, Malaysia broadly observes this principle, adding that the "oversight activities undertaken by the bank in 2007 were centered on reducing overall risks in the payment system" (p. 109). The report also states that the BNM enables participants to have a clear understanding of settlement risks they incur through participation in RENTAS.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

EN

The BNM's 2008 report states that Malaysia fully observes this principle, adding that the "oversight activities undertaken by the bank in 2007 were centered on reducing overall risks in the payment system" (p. 109). The report notes that the BNM has introduced several clearly defined procedures for the management of credit and liquidity risks. In 2007, the BNM announced plans to reduce risks in the RENTAS system by improving the efficiency of liquidity management in the system. According to the 2008 BNM report, "these enhancements will facilitate the continuous settlement of inter-bank transactions with lower liquidity requirements, hence enabling more efficient liquidity management by RENTAS participants without increasing settlement risk" (p. 112).

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

EN

According to the BNM's 2008 report, RENTAS fully observes this principle, since it provides prompt final settlement on the day of value. According to the same report, "the RENTAS system has achieved its objective of mitigating settlement risk by providing participants with a means of settling payment obligations in real time with finality" (p. 112).

According to the 2002 EMEAP report, all transactions are processed and settled on a real-time basis through a book-entry mechanism. The RENTAS system features several kinds of settlement accounts, such as the Islamic banking scheme current account, the statutory reserve account, and the Vostro account. Also, the system is equipped with straight-through processing capability, transfer and settle inter-bank funds and Scripless securities transactions simultaneously in real-time. Most importantly, the transfers are processed on a gross basis and provide finality.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

II

The BNM's 2008 report observes that this principle is not applicable to Malaysia since RENTAS is a real time gross settlement system.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

EN

According to the BNM's 2008 report, Malaysia fully observes this principle, since settlements in RENTAS are claims on the central bank. The 2002 EMEAP report observes that "as each inter-bank credit and debit transfer is sent and received by member institutions, their account records in the Central Host System (CHS) at the BNM for inter-bank funds transfer will be credited or debited accordingly, depending on the availability of funds in the remitter's account" (p. 288).

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

EN

The BNM's 2008 report states that Malaysia broadly observes this principle, and notes that RENTAS has a high degree of security and operational reliability and has contingency arrangements for timely completion of daily processing. The report also adds that RENTAS did not encounter any major disruptions in 2007, noting that the BNM "strives to ensure that the design and operation of RENTAS meet an appropriately high standard of availability and resilience" (p. 111). The report also states that the BNM assumes a central role in promoting payment innovations and enhancing the safety, security and efficiency of the payment systems. To ensure a high degree of security and operational reliability, the BNM regularly organizes the testing of business continuity arrangements on a coordinated basis involving the user community serves to reinforce the robustness and resilience of the systemically important payment system. Furthermore, according to the EMEAP report, the BNM has put in place several security measures to maximize the safety and integrity of the RENTAS system, such as point-to-point secure connections, the use of personal IDs and passwords and digital signature authentication. Also, the BNM's contingency site is always in a "hot standby" mode, which basically allows processing to resume in a few hours in the event of a breakdown.

According to its 2008 report, the BNM also manages, in tandem with each RENTAS participant, complex contingency arrangements for timely completion of daily processing. Perhaps the most important of these are the RENTAS Disaster Recovery Centre (DRC) sites. Each RENTAS participant is required to operate a DRC. Also, BNM requires RENTAS members to conduct live runs from their DRC sites at least four times a year to test the state of readiness of their disaster recovery sites. In June 2007, to ensure the reliability of the DRC sites, the BNM successfully conducted an industry-wide DRC live run operation. In addition, the BNM has "introduced a second level back-up facility to RENTAS members which may be activated only in the event that both their production and DRC sites are down" (p. 112).

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

EN

According to the BNM's 2008 report, Malaysia broadly observes this principle, adding that, in 2007, the BNM focused its oversight efforts on improving the overall efficiency of the payment system, in addition to addressing systemic risk and sustaining public confidence in the retail payment systems. The 2008 BNM report notes that the central bank "has a responsibility to promote improvements in the payment system to increase the overall efficiency of the payment system as well as to make payments more convenient and cost-effective for end-users" (p. 114). For instance, the BNM is particularly devoted to enhancing the efficiency of check clearing since, according to the BNM report, checks still account for a significant portion of non-cash retail transactions, at 93% in 2007 compared to 97% in 2003. As a result, in May 2008, the BNM introduced a fully image-based check-clearing process called the Cheque Truncation and Conversion System (CTCS) or eSPICK, which allows the clearing of checks to be done through truncation or conversion modes, hence eliminating the physical movement of checks once deposited at the collecting banks. The eSPICK is expected to reduce the risks and costs associated with the physical handling of checks and also improve the efficiency of the overall check-clearing process. This increases the efficiency of Malaysia's economy and markets because the "payment and receipt of funds by customers would be expedited with customers receiving funds on the next business day, regardless of where the check is deposited, compared to between two to eight business days currently" (BNM 2008, p. 114).

In 2007, the BNM, in collaboration with the Accountant General's Department and several corporate banks, announced plans to put in place the processes needed for the reconciliation of payments and collections made by the government through the RENTAS systems. According to the BNM's 2008 report, the central bank expects the combination of the adoption of these e-payment systems, enhanced operational efficiency and productivity through the reduction or redeployment of resources, and cost savings from less cash handling and speedier payments and receipts to yield substantial efficiency gains for the Malaysian government and payment recipients.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

EN

The BNM's 2008 report states that Malaysia fully observes this principle. According to the 2002 EMEAP report, all financial institutions licensed under the Banking and Financial Institutions Act of 1989, Islamic Banking Act of 1983 or any other institutions approved by BNM may participate in the RENTAS system. This information is also posted on the BNM's website. Furthermore, in 2004, the BNM revised the access policy to the RENTAS system to improve operational efficiencies and to reduce settlement risk. Under the new plan, new participants have the same ability of settling financial obligations and receiving funds through the use of the central money or the settlement account held by the BNM.

X. The system's governance arrangements should be effective, accountable and transparent.

EN

According to the BNM's 2008 report, Malaysia broadly observes this principle, and RENTAS' governance arrangements are effective, accountable and transparent. The 2002 EMEAP report and the BNM website states that RENTAS is governed by the RENTAS Participation Rules and RENTAS Members Rules, which were formulated by the BNM in collaboration with commercial banks after a comprehensive consultation process undertaken with all stakeholders. However, BNM has the right to vary, amend, add or revoke any of the provisions in these Rules. In addition, if a dispute arises between RENTAS participants, the BNM is not permitted to determine the legality, validity or enforceability of any transaction under the RENTAS system. All disputes can be heard and resolved at an arbitration committee formed by the Association of Banks in Malaysia. Finally, the rules stipulate that the BNM is entitled to regard all transactions executed under the RENTAS system as legal, valid and enforceable to ensure that the settlement is not disrupted.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

EN

The BNM's 2008 report states that Malaysia broadly observes this principle, adding that the BNM clearly defines and discloses publicly its roles and policies regarding Malaysia's payment systems. The 2008 BNM report notes that the central bank's oversight responsibilities for the payment and settlement systems in the country are drawn from the Payment Systems Act of 2003. Furthermore, Part 2 Section 4 of the 1958 Central Bank of Malaysia Act 1958 (revised in 1994) mandates the BNM "to promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia." The other main legislation governing payment systems in Malaysia are the Banking and Financial Institutions Act of 1989, which requires any person who intends to operate an electronic funds transfer system to obtain BNM approval, and the Bills of Exchange Act of 1949, which, along with the Contract Act of 1950, provides a comprehensive legal provision for the usage of paper-based checks and other bills of exchange. All of the laws and regulations governing the BNM's role regarding payment systems are publicly available on the BNM's website.

According to information provided on its website, the BNM performs three roles in the area of payment systems in Malaysia, namely, as the operator and overseer of the payment systems, and facilitator to the payment system services. Since 2005, the BNM has also organized the Payment Systems Forum & Exhibition, attended by relevant stakeholders like financial institutions, payment service providers, government agencies, corporations and industry associations, to increase public awareness of the various payment channels available and to exhibit payment products and innovation.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

EN

According to the BNM's 2008 report, Malaysia broadly observes this principle, adding that the BNM provides ample oversight of Malaysia's systemically important payment systems. The 2002 EMEAP report states that the BNM developed, owns and operates the Real Time Transfer of Funds and Securities (RENTAS) system, a systemically important payment system. Specifically, RENTAS is managed by the Payment Systems Department of BNM, which is also responsible for the oversight of payment systems in the country. Therefore, as noted in the 2006 BNM report, in its capacity as the supervisor of the payment systems, the BNM ensures that RENTAS complies with the Core Principles by conducting an annual self-assessment, benchmarked against the CPSS Core Principles for Systemically Important Payment Systems (CPSIPS).

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

II

The BNM's 2008 report notes that this principle is not applicable to the BNM.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

EN

According to the BNM's 2008 report, Malaysia fully observes this principle. The report further notes that the BNM has a cooperative oversight arrangement with the Hong Kong Monetary Authority (HKMA) to manage systemic risk associated with the cross-border link between RENTAS and HKMA's USD CHATS. This effort is part of an overall effort by both regulatory agencies to establish points of contact and procedures for the oversight activities of the link. This cooperative arrangement also includes business continuity plans for the PvP and DvP links of RENTAS-USD CHATS.