RBI supervision of Financial Market Infrastructures (FMIs) and Retail Payment Systems (RPSs)

The recent document on Financial Market Infrastructures (FMIs) and Retail Payment Systems (RPSs) by RBI in its web site dated 13th June 2020 is the discussion of this article. A Financial Market Infrastructure (FMI) is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions. The term FMI generally refers to Systemically Important Payment Systems (SIPS), Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) that facilitate the clearing, settlement, and recording of financial transactions.

In a layman’s language:

  • FMIs form the backbone of the financial system and contribute to financial stability and economic growth by providing reliable, safe, and efficient payment, clearing and settlement services to users.
  • Payment and settlement systems enable lending and repayment of money, allow businesses to receive payments for goods and services offered, and facilitate payment of salaries and benefits to the general public.
  • SSSs enable the purchase and sale of equities and bonds, and also effect their settlement by book entry according to a set of predetermined multilateral rules.

I can presume usage of debit cards, credit cards, payment of Ola car services, purchase and sale of equities like shares, purchase of government bonds, purchase of non-convertible debentures or payment of installments of housing or household items etc. fall under the above explanations.

You may wonder why RBI is interested in supervision of the systems which enable some of the activities explained above.

This article clearly looks at the broad canvas enabled by RBI in its web site which is full technical jargons, explanation of complex operations, audit and supervision role to be exercised by RBI as well as exhaustive returns to be submitted periodically by the above systems to RBI.

https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3864#S1

For one who is exposed to modern IT systems, it is a cake walk to wade through hundreds of technical information given by RBI but we all know in real life IT systems are for our usage and their safety is the prime concern of modern institutions since frauds increase every day to help the cheats.

However, what are the salient features of RBI communication is our study today. Whenever you find my descriptions a bit clumsy or confusing, you must refer to the above online RBI communication.

Now, over to RBI messages.

Following 8 sections form the main content of RBI communication while 11 appendices contain lot of technical information.

Section 1 Background

Section 2 Introduction

Section 3 Legal frame work for oversight

Section 4 Designation of FMIs regulated by RBI

Section 5 Definition and scope of oversight

Section 6 Oversight activities

Section 7 Cooperation with other Regulatory bodies

Section 8 Organization and oversight function

We shall deal with 11 appendices at the end.

“Oversight of payment and settlement systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change.” was the statement of( Committee on Payments and Market Infrastructures – CPMI) the international cooperation venture which ushered in the involvement of RBI in India.  For effective oversight function, five core principles like transparency, international standards, effective powers and capacity, consistency and cooperation with other authorities were enunciated.

Accordingly, a comprehensive set of 24 principles were issued as part of the report titled “Principles for Financial Market Infrastructures” (PFMI) published in April 2012. The main objectives of these principles for FMIs are to enhance safety and efficiency in payment, clearing, settlement, and recording arrangements, and more broadly, to limit systemic risk and foster transparency and financial stability.

Let us meander into legal frame work for oversight.

Chapter IV of the PSS Act and its various Sections / clauses, provide for the Regulation and Supervision of such Payment Systems. The powers to regulate and supervise comprise: (RBI simply adopted the following from international body and hence I could not change any word.)

i. “Section 10: Power to determine and prescribe standards– in respect of format, size and shape of payment instructions, timings to be maintained by payment systems, manner of fund transfers, criteria of membership of payment systems and their rights and obligations, and issuance of guidelines for effective management of payment systems.

ii. Section 11: Notice of change in the Payment System– system providers shall not cause any change effecting the structure and operation of the payment system without prior approval of RBI.

iii. Section 12: Power to call for returns, documents or other information– empowers RBI to call for returns, documents or other information from any system provider regarding operations of payment systems operated by them.

iv. Section 13: Access to information– empowers RBI to access any information relating to any payment system with the system provider and the system participants.

v. Section 14: Power to enter and inspect– empowers RBI to enter and inspect any premises where a payment system is operated and any equipment including any computer system or other documents.

vi. Section 16: Power to carry out audit and inspection– empowers RBI to conduct or get conducted audits and inspections of a payment system or system participants.

vii. Section 17: Power to issue specific direction– empowers RBI to issue directions to a system provider or system participant to cease and desist from any act, omission or course of conduct that would result in systemic risks or affects the payment system, monetary or credit policy of the country.

viii. Section 18: Power of RBI to give directions generally– empowers RBI to lay down policies relating to the regulation of payment systems, including electronic, non-electronic, domestic and international payment systems affecting domestic transactions, and give directions to system providers or the system participants either generally or to any such agency, pertaining to the conduct of business relating to payment systems.

ix. Section 19: Directions of RBI to be generally complied with– imposes a duty on every person to whom a direction is issued by the RBI to comply with such direction and submit compliance.”

Let me conclude the above technical jargon as prescription of standards to be followed, proper notice if any change of systems proposed for operation, obviously power to call information by way of documents, establish audit systems for timely supervision, issue directions depending upon the emergency and enforce a heavy responsibility on any one to strictly follow the directions of RBI indicating its authority as the top boss. I have intentionally reproduced the language so that we learn international standards at convenience.

What are the FMIs regulated by RBI? Can we hear the names used by RBI as well as in private sector domains?

  • One of the responsibilities of regulatory authorities is to define and publicly disclose the criteria used to identify FMIs that should be subject to regulation, supervision and oversight by RBI.
  • The RTGS system is the only large value payment system functioning in India and the value of transactions processed as a percentage of total payment transactions is 77% during the month of March 2020. This is the only FMI operated by RBI. A powerful and an effective tool whose misuse will wreck the Indian financial system.
  • The one used in private sector and duly authorized by RBI- The CCIL, functioning as a central counterparty in various segments of the financial markets regulated by the RBI (viz. the government securities segment, tripartite repo, USD-INR and forex forward segments), is designated as an FMI as per the definition provided in the PFMI Report.
  • RBI has also designated CCIL as a Trade Repository under Section 34 A (2) of PSS Act for OTC interest rate, credit and forex derivative transactions as mandated from time to time. Yes, it is designated as FMI by RBI.
  • NPCI is the umbrella organization for operating retail payment systems in the country; its share as against the entire payment landscape of India stood at 64.5% by volume and 4.07% by value during the month of March 2020. Like your presumption, I too agree that NPCI has been designated as a system wide important payment system (SWIPS) and would be assessed against the PFMIs.

RBI through its role as an oversight body aims for the following goals:

  • Governance arrangements
  • Comprehensive management of risks
  • Credit risk management
  • Liquidity risk management
  • Collateral
  • Operational risk management
  • Default management
  • Recovery and Resolution Plans
  • Settlement finality
  • Settlement in central bank money– They should preferably conduct their money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

You may refer page 14-16 of RBI communication for detailed explanation of above items and clear explanations.

As a mark of cooperation among other regulatory authorities, RBI has set up an inter-regulatory committee of other regulatory authorities like SEBI, IRDA or TRAI. It is intended to have safe and secured systems to carry out financial instruments which would not harm the operations of genuine operating common man in a cellular phone to the most complex operations done by any commercial bank in routine operations, borrowed arrangements or foreign exchange management both at unit level of a trader to the RBI level of currency managements.

Yes, purchase of a bread using Paytm to complex multi currencies operations in foreign exchange management need safety and utility in normal life. It is but natural for RBI to coordinate among payment systems at national/international level. With the expertise obtained by RBI, Bhutan is utilizing RBI for its consultancy or conduct of operations.

Organization of the Oversight Function

Let us look at the words of RBI for this solemn job. One can easily understand that RBI needs to have an effective and tech savvy of man power to manage this overbearing task worth billions of  US $.

A dedicated Oversight Division in the Department of Payment and Settlement Systems (DPSS) at Central Office of RBI has been institutionalized and is tasked with the responsibility to conduct oversight of all payment systems. The Central Office Oversight Division is supported by DPSS cells set-up at four Regional Offices at Mumbai, Delhi, Chennai and Kolkata. Skilled resources are drawn from other departments while undertaking the assessment / onsite inspection of FMIs / RPSs.

Appendices

I intend giving the names of all appendices for information and deal with the first appendix in details for learning purposes. As I made my intention clearly in the beginning, the article consists of high-tech operations of RBI newly introduced to merge Indian financial operations with the best in the world which necessitates upgrading its skills into unknown territories. Even people from a small country like Nigeria to an advanced country like China have enabled thousands of crooks who either siphon off money from genuine customers of good institutions or indulge in hacking activities to result in huge monetary gains totally unknown to the modern world at any point of need. For us traditional bankers with reliability and honesty as the watch word, the world has moved away.

Appendix 1

Schedule of activities

 The FMIs would be overseen as per the “Oversight Framework for Financial Market Infrastructures and Retail Payment Systems”. The entities covered as part of this framework and the activities to be undertaken are as follows:

  • Real Time Gross Settlement System (RTGS):RTGS system is owned and operated by the RBI
  • Central Securities Depository (CSD) – Securities Settlement Systems (SSS): The CSD-SSS for the Government Securities system is operated by PDO / Mumbai office. Assessment would be against the PFMIs.

Clearing Corporation of India Ltd (CCIL)

  • “Disclose self-assessment on compliance with PFMIs on an annual basis as per the Disclosure Framework prescribed in PFMI.
  • Quantitative Disclosure as per the disclosure Framework prescribed by the CPMI-IOSCO on a Quarterly basis.
  • Onsite inspection and assessment of CCIL to be undertaken annually by DPSS or get conducted by external agency.
  • Before initiation of Onsite inspection, an Onsite Compliance Audit to be undertaken to verify compliance against the Inspection observations. The minimum coverage should be as per the framework prescribed.
  • To ensure resilience of the system, CCIL to conduct Operations Review on a monthly basis and also undertake an IT System Review by external auditors and to also submit a System Audit Report on an annual basis.
  • CCIL to undertake an annual validation and review of its Risk Management framework by external auditors to ensure that its systems are resilient.
  • CCIL to seek the RBI’s approval before initiating changes in any systems or processes and before introducing any new product.
  • CCIL is also expected to intimate the RBI in case of any abnormal developments.
  • CCIL to furnish on a monthly / quarterly / semi-annual basis the reports / data / information as prescribed in the Appendices 4 and 8, to the RBI.”(pages 47 and 62 of RBI communication)

One can easily refer to Appendix 1 for information about National Payments Corporation of Indic, Cards payment networks, Cross border money transfer, ATM networks, Prepaid payment instruments, Bharat bill payment system, Trade receivables discounting system, White Labels ATM Operators etc. This will enrich your knowledge about latest developments in our country.

More about appendices

I can enlist the names of all appendices for you to go through and upgrade your knowledge and widen its horizon.

1. Appendix 2 Information submitted as part of the application

2. Appendix 3 Returns, documents and other information to be submitted by Authorized Payment Systems

3. Appendix 4 Data / Information to be furnished by CCIL

4. Appendix 5 Overview of the Principles for Financial Market Infrastructures

5. Appendix 6 IT Audit, Security, Fraud prevention and Risk Management Framework

6. Appendix 7 System Audit of Authorized Payment System Operators under Payment and Settlement Systems (PSS) Act, 2007 – Review of Scope and Coverage

7. Appendix 9 General applicability of principles to specific type of FMIs

8. Appendix 10 Applicability of PFMIs to Important Retail Payment Systems (IRPS) and Other Retail Payment Systems (ORPS)

9. Appendix 11 Table of Acronyms

Conclusion

The purpose of writing this article is to introduce a simple professional the latest developments happening in the financial world right from paying milk by Paytm to the most complicated forward cover booking of foreign exchange operations, currency management by RBI on day to day operations, vast multitude of banking operations numbering billions in number at any moment of the day and the onerous duties of RBI to evolve supervision with nil risk to any one involved in the operations. Reading of the communication released by RBI was mind boggling and left me in awe d.

You are requested to read the original communication of RBI running into 74 pages of technical information to make you all well informed.

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