## Philippines: Report on Observance of Standards and Codes—Payment Systems

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### Introduction and executive summary
- Assessment based on “Core Principles for Systemically Important Payment Systems” (Jan. 2001) by CPSS and FSAP Guidance Note (Aug. 2001).
- Assessment completed on September 16, 2002 as part of the Financial System Stability Assessment; included in IMF Country Report No. 05/22 (© 2005 International Monetary Fund).
- Overall: infrastructure for effective supervision has improved considerably; compliance is overall quite high, but important and critical weaknesses remain.
- Key supervisory challenge: reorient framework away from forbearance and liquidity support to early problem identification, prompt corrective action and resolution.
- Authorities have requested technical assistance and a comprehensive action plan to address specific concerns and raise compliance with standards and codes.

### Institutional arrangements and market structure
- Key institutions and roles:
  - Bangko Sentral ng Pilipinas (BSP): leading role in establishing interbank clearing facilities, primary settlement agent for Peso funds transfers.
  - Philippine Clearing House Corporation (PCHC): provides infrastructure for clearing, communications network and software for transmission of settlement instructions between participating banks and BSP.
  - Citibank: settlement bank for U.S. dollar payments.
  - Philippine Central Depository (PCD) and PCHC: system operators for PDDTS real-time and batch transactions.
- Major interbank clearing systems account for over 92 percent of interbank funds transfers.
- Consumer payment instruments:
  - Paper cheques and cash remain the main means.
  - ATMs: ~1,250 transactions a day in 1999.
  - Credit cards: 2.8 percent of population in 1997.
  - EFTPOS: ~1,600 transactions a day in 2000.
  - Multi-purpose pre-paid card instruments were recently introduced (examples cited).
- Recent and ongoing developments:
  - Enhancement of MIPS to MIPS2 (from net to gross settlement) in July 2001.
  - RTGS project initiated Jan. 2001; BSP evaluating proposals from four companies.
  - October 2001: PCHC assumed responsibility to clear inter-regional cheques; BSP continued to clear 27 local regional ones.
  - Electronic Commerce Act (RA No. 8792) and Rules on Electronic Evidence (July 17, 2001) enacted to support electronic payment system development.
  - Arbitration procedures by PCHC established to address cheque fraud cases; effectiveness to be observed over time.
  - Peso-Netting system appears under-utilized for low-value interbank payments.

### Key statistics (Table 1: Comparative Table of Interbank Payment Systems — Values in PHP Mil. and volumes)
- Cheque clearing: 62,436.69 (Value), 455,749 (Volume)
- MIPS2-IBCL: 52,483.94 (Value), 169 (Volume)
- PDDTS-U.S. dollars gross: 30,354.38 (Value), 835 (Volume)
- EFTIS: 6,776.25 (Value), 177 (Volume)
- Peso netting: 4,210.52 (Value), 1,927 (Volume)
- ROSS: 1,119.28 (Value), 15 (Volume)
- Securities settlement: 876.00 (Value), 5,200 (Volume)
- PDDTS-U.S. dollars netting: 37.99 (Value), 32 (Volume)
- Notes on table sources:
  - Cheque clearing: Estimated figures from PCHC (Jan.–Sep. 2001).
  - MIPS2 and others: BSP figures (until Oct. 2001) where indicated.
  - PDDTS-U.S. dollars gross: Citibank figures (until Aug. 2001), using US$1=PHP50.8134 (BSP, Oct. 2001).
  - Securities settlement: PCD Annual Report 2000 (gross trades).
  - Peso netting: PCHC figures for Y2000.
- Securities transactions daily funds settlement (net) averaged PHP 176.5 million and are settled via the cheque clearing system.

### Main findings — summary by CPSS Core Principles areas
- Identified Systemically Important Payment Systems (SIPS): MIPS2, cheque clearing, PDDTS-U.S. dollar gross.
- Legal foundation (CP I)
  - Legal and regulatory framework for BSP-established interbank clearing facilities exists, but settlement finality for public and private systems is inferred via contractual obligations rather than explicit legal underpinning.
  - This inference may complicate enforceability, particularly in insolvency of a major participant; clarity is needed.
  - Oversight responsibilities and central bank powers over private-sector operators (e.g., PCHC, PCD, PDDTS) are unclear.
  - Manual unwinding process for clearing items poses risk given high values through cheque clearing, compounded by long float times and cheque fraud incidents.
- Understanding and management of risks (CPs II–III)
  - Rules and procedures are comprehensive and clear but mainly encapsulated as contractual agreements, potentially weakening enforceability.
  - Tools and incentives to manage credit and liquidity risks are generally available, though limited.
  - Settlement banks (BSP and Citibank) may face exposures by implicitly guaranteeing settlement.
  - RTGS design specifications would allow participants to manage liquidity more effectively.
- Settlement (CPs IV–VI)
  - MIPS2 and cheque clearing settle in central bank money in real-time and end-of-day manners respectively.
  - PDDTS U.S. dollar payments settle in real-time across the books of a commercial bank (Citibank).
  - Manual cheque unwinding raises concerns, especially if the participant with the largest single settlement obligation cannot settle.
- Security, operational reliability, contingency arrangements (CP VII)
  - Contingency plans generally exist, but resource capabilities and independent IT security audits require improvement.
  - Offsite backup facilities and coordination of plans need strengthening; remote backups should be in effectively distant locations to minimize concentration risks.
  - BSP had identified deficiencies and was actively addressing them.
- Efficiency and practicality (CP VIII)
  - Systems leverage existing infrastructures (MIPS2 on PCHC, PDDTS on PCD), reflecting practicality given current IT investments and expertise.
  - Except for PDDTS, formal mechanisms to monitor operational cost-benefit trade-offs and efficiencies are rudimentary.
- Criteria for participation (CP IX)
  - Participation criteria are not explicit but implicitly understood; BSP provides high-level regulatory safeguards via banking supervision.
  - No apparent anti-competitive practices compromising safety, fairness or efficiency.
- Governance (CP X)
  - Availability of information, consultations, and communications are generally fine.
  - Governance structures observed to be fairly effective, accountable and transparent, but could be strengthened by clearer oversight authority and clarification of overlapping ownership/membership structures.
- Central bank responsibilities in applying the CPs
  - BSP’s objectives, major policies and oversight of SIPS are implied through legislation, contractual agreements and powers over bank participants.
  - Payment system oversight in practice, especially over PCHC and private sector operators, is unclear.
  - BSP self-assessments of SIPS and development of necessary expertise would support safe and efficient payment systems.

### Recommended Action Plan (condensed)
- Legal foundation (CP I)
  - Elevate settlement finality to a directive for better legal underpinning.
  - Clarify procedures in cases of participant insolvency.
  - Introduce explicit legal recognition of netting arrangements.
- Understanding and management of risks (CPs II–III)
  - Consolidate rules and regulations into separate, comprehensive and readily available documents.
  - Study feasibility of multiple clearing cycles within a day to reduce end-of-day load and risk.
- Settlement (CPs IV–VI)
  - Review and establish loss sharing or other measures to minimize systemic risks in instances of default.
  - Clarify the settlement of U.S. dollar in Philippines vis-à-vis United States.
- Security, operational reliability, contingency arrangements (CP VII)
  - Develop comprehensive and coordinated contingency plans.
  - Conduct regular end-to-end IT audits to ensure security policies and operational service levels match market and technological developments.
  - Establish remote backup facilities to remove concentration risk.
- Efficiency and practicality (CP VIII)
  - Review cost structures and establish policies to promote better efficiency.
  - Conduct economic, technology and market impact analyses of system designs and procedures and propose improvements.
- Criteria for participation (CP IX)
  - Make explicit the participation criteria.
  - Specify procedures on exclusion of participants from the system.
- Governance of the payment system (CP X)
  - Publish information on operations, governance structure and decision-making processes for greater transparency.
- Central bank responsibilities (Responsibilities A–D)
  - Disclose payment system objectives, and the role vis-à-vis different payment system operators and SIPS for clarity and transparency.
  - Conduct thorough self-assessments of the SIPS against the core principles to identify and rectify other weaknesses.
  - Establish a team of payment system specialists to coordinate internal payment system policies, operations and risk management, and liaise with other authorities and the industry to promote safety and efficiency.
  - Study wider issues and implications of foreign currency settlement systems in Philippines and seek consultations and cooperation with relevant foreign authorities.

*Source: IMF Country Report No. 05/22 (© 2005 International Monetary Fund), based on background documentation completed on September 16, 2002.*

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