In a 2005 Report on Observance of Standards and Codes (ROSC), the International Monetary Fund (IMF) notes that the Philippines has three systemically important payment systems (SIPS), namely, the Multi-transaction Inter-bank Payment System (MIPS2), check clearing, and the PDDTS - U.S. dollar gross systems. However, in 2002, a Real Time Gross Settlement (RTGS) system called the Philippine Payments and Settlements System (PhilPaSS) replaced the MIPS2 as the interbank settlement system. According to information provided on the Central Bank of Philippines (BSP) website, the BSP, in its design and operation of PhilPaSS, adheres closely to the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). However, apart from this statement by the BSP, there is insufficient information publicly available regarding this system's compliance with the CPSIPS. The 2005 IMF ROSC notes that the BSP has established the legal and regulatory framework for interbank clearing facilities, however, the legal language for finality of settlement is unclear. Furthermore, the 2005 ROSC notes that the responsibility of the BSP with regard to payment systems oversight and supervision is also unclear.

General Overview

The International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) in 2002 of the Philippines, during which the IMF assessed the country's Systemically Important Payment Systems (SIPS) against the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). At the time of the FSAP the SIPS identified were the Enhanced Multi-transaction Interbank Payment System (MIPS2), the check clearing system and the PDDTS-U.S. dollar gross systems. However, in 2002, the MIPS2 was replaced by a real-time gross settlement system -- the Philippine Payments and Settlements System (PhilPaSS) -- as the interbank settlement system.

According to the Central Bank of the Philippines (BSP) website, the BSP "adheres closely to the Core Principles for systemically important payments systems in the design and operation of the PhilPaSS." The BSP in its report "The Philippine Payments and Settlements System (PhilPaSS)" notes that PhilPaSS is an RTGS system where there is continuous processing and settlement of funds, and it is owned and operated by the BSP.

In its "2006 Annual Report", the BSP notes that the PhilPaSS is continuously being upgraded to ensure efficiency in order to improve the country's overall financial infrastructure. According to the report, the volume of financial transactions that were settled through PhilPaSS in 2006 was 439,028, a growth of 19.2 percent. According to the 2005 IMF ROSC, the BSP, the Philippine Clearing House Corporation (PCHC) and the major banks in the Philippines are the main participants in the Philippines payment systems. The IMF report indicates that Citibank serves as the settlement bank for U.S. dollar payments. The 2005 IMF report further notes that the BSP has established the legal and regulatory framework for interbank clearing facilities. However, the legal language for finality of settlement is unclear. The IMF report adds that the responsibility of the BSP with regard to payment systems oversight and supervision is also unclear and recommended that the BSP "disclose payment system objectives, the role vis-à-vis different payment system operators and SIPS for clarity and transparency" (p. 7).

The Principles

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

II

In 2005, the IMF released a Report on Observance of Standards and Codes (ROSC) that identified three Systemically Important Payment Systems, namely, the Enhanced Multi-transaction Interbank Payment System, the check clearing system and the PDDTS-U.S. dollar gross systems. However, in 2002, the MIPS2 was replaced by an RTGS system -- PhilPaSS -- as the interbank settlement system and there is insufficient information regarding this system's compliance with the CPSIPS.

The 2005 IMF ROSC notes that the legal and regulatory framework was in place for the systems assessed by the IMF. The report also notes that "the specific oversight responsibilities and central bank powers over payment system operators (e.g., PCHC, PCD) is unclear, particularly in the case of private-sector established interbank clearing systems (PDDTS)" (p. 4).

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.

II

The BSP's report "The Philippine Payments and Settlements System (Philpass)" notes that the Agreement for the Philippine Payments System via Real Time Gross Settlement (PPS-RTGS) and the Rules and Regulations Governing the Philippine Payments System via Real Time Gross Settlement embodies the rules and regulations that govern the PhilPaSS. However, there is insufficient information regarding this system's compliance with the CPSIPS. In 2005, the IMF released a ROSC that identified three Systemically Important Payment Systems, namely, the Enhanced Multi-transaction Interbank Payment System, the check clearing system and the PDDTS-U.S. dollar gross systems. According to the 2005 ROSC, "the rules and procedures for all systems are comprehensive and clear, but their general encapsulation as contractual agreements may weaken their enforceability" (p. 4).

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.

II

A report by the BSP titled "The Philippine Payments and Settlements System (Philpass)" states that "all settlement and payment instructions by participants are subject to verification to avoid possible duplication or unauthorized payments" (p. 16). However, there is insufficient information regarding this system's compliance with the CPSIPS.

The 2005 IMF ROSC indicated that the mechanisms to manage credit and liquidity risks are generally in place with regards to the three systems assessed by the IMF, namely the Enhanced Multi-transaction Interbank Payment System, the check clearing system and the PDDTS-U.S. dollar gross systems.

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.)

II

The BSP's report "The Philippine Payments and Settlements System (Philpass)" states that "all transactions settled in PhilPaSS are considered final and irrevocable" (p. 20). However, there is insufficient information regarding this system's compliance with the Core Principles for SIPS.

According to the 2005 IMF ROSC, the check clearing system settles at the end of the day and the PDDTS settles U.S. solar payments in the books of Citibank in real time. The report, however, states that the manual unwinding process for checks is a cause for concern in the check clearing system. However, there is insufficient information publicly available regarding Philippines compliance with this Principle.

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

According to the 2005 IMF ROSC, the check clearing system settles at the end of the day and the PDDTS settles U.S. solar payments in the books of Citibank in real time. The report, however, states that the manual unwinding process for checks is a cause for concern in the check clearing system. However, there is insufficient information publicly available regarding Philippines compliance with this Principle.

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.

II

As reported by the IMF in its 2005 ROSC, the check clearing system settles in central bank money and the PDDTS settles in the books of Citibank. However, there is insufficient information publicly available regarding Philippines compliance with this Principle.

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

II

The BSP's report "The Philippine Payments and Settlements System (Philpass)" states that "PhilPaSS has two back-up equipment and off-site location that can be made operational immediately in the event that its primary site is inoperable" (p. 21). The report further notes that in the extraordinary event that the two back-up equipment also become inoperable, the BSP can resort to Electronic Fund Transfer Instruction System with causing any settlement disruptions in the system.

According to the IMF's 2005 ROSC, "the contingency plans are generally in place, but the resource capabilities and independent audit of the IT security and controls of the Central Bank of the Philippines and the Philippine Clearing House Corporation systems, and particularly the offsite backup facilities and coordination of plans, would need to be improved" (p. 5). The BSP, according to the IMF report, is aware of this shortcoming and has sort to address it.. However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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

II

The IMF's 2005 ROSC notes that there "is a good sign of the practicality of all parties given the level of IT investments, pool of expertise and general readiness of participants" (p. 5). The report also notes that systems were generally observed to be efficient. However, the IMF ROSC does not assess the practicality and efficiency of the Philippine Payments and Settlements System, which replaced the Enhanced Multi-transaction Interbank Payment System in 2002.

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

II

The BSP's report "The Philippine Payments and Settlements System (Philpass)" identifies requirements for admission of new participants to Philpass. And according to the 2005 IMF ROSC, there is no explicit criteria for participation in the payment systems, however, the report also admits that there no anti-competitive practices that may effect the safety and fairness of the systems. However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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

II

The 2005 IMF ROSC states that "the governance structures were observed to be fairly effective, accountable and transparent, and could be strengthened by better clarity on the appropriate oversight authority and overlapping ownership/membership structures of the parties involved" (p.5). However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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.

II

According to the 2005 IMF ROSC, BSP's payment system objectives are implied in legislation and contractual agreements. Nonetheless, the IMF recommends that the BSP "disclose payment system objectives, the role vis-à-vis different payment system operators an SIPS for clarity and transparency" (p. 7). However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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

II

The IMF in its report recommended that the Philippines conduct a self assessment of its SIPS against the CPSIPS. However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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 IMF in it 2005 ROSC notes that "the specific oversight responsibilities and central bank powers over payment system operators is unclear, particularly in the case of private-sector established interbank clearing systems" (p. 4). The IMF report recommended that the Philippines conduct a self assessment of it SIPS against the CPSIPS. However, there is insufficient information publicly available as to Philippines compliance with this Principle.

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.

II

In its 2005 ROSC on the Philippines, the IMF recommends that the "Philippines establish a team of payment system specialists to coordinate internal payment system policies, operations and risk management, as well as liaise with other authorities, agencies and the industry to promote safety and efficiency" (p. 7). However, there is insufficient information publicly available as to Philippines compliance with this Principle.