## _cr1358 — Assessment of RENTAS, BMSC, BMDC, BMDepo (FSAP field missions July 2012) ## Source details **Canonical URL:** [_cr1358 — Assessment of RENTAS, BMSC, BMDC, BMDepo (FSAP field missions July 2012)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1358.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1358.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1358.pdf.json) --- ### Executive summary — jurisdiction, structure, and recent exercises - Jurisdiction: - Clear demarcation between Bank Negara Malaysia (BNM) and Securities Commission (SC). - BNM: oversight of payment systems and settlement systems for unlisted government, BNM and private debt securities. - SC: regulation, supervision and oversight of FMIs for corporate securities and derivatives. - Major operators and structure: - MyClear: 100% owned BNM subsidiary operating RENTAS (integrated RTGS + CSD + SSS). - Bursa Malaysia Berhad (BM): exchange holding company with subsidiaries: - Bursa Malaysia Securities (BMS) — securities exchange. - Bursa Malaysia Derivatives (BMD) — derivatives exchange (joint venture with CME). - Bursa Malaysia Securities Clearing (BMSC) — CCP for securities. - Bursa Malaysia Derivatives Clearing (BMDC) — CCP for derivatives. - Bursa Malaysia Depository (BMDepo) — lone CSD for BMS-traded securities. - Recent exercises: - BM conducted a default drill proposed Jan 2012 and executed Dec 2012; assessors were notified of successful conduct. - BMDC and BMSC instituted default drills post-assessment; annual drills planned. ### RENTAS — assessment highlights, functions and key statistics - Assessment approach and results: - RENTAS assessed against CPSS‑IOSCO PFMIs as a unified system. - Observes 19 principles; five principles not applicable. - Key services and design: - Integrated RTGS, Scripless Securities Depository and Settlement System (SSDS), modules IFTS, MYR SAS, MCT SAS, SSDS. - Business hours MYR settlement: from 8:00 am to 6:00 pm on all business days. - Links: USD CHATS (Hong Kong) PvP, Bank of China Malaysia (BOCM) MYR-RMB PvP, Euroclear link (commissioned March 2012; no usage since April 2012). - Liquidity and intra-day credit: - Sources: participants’ opening balances; participant statutory reserve balances; incoming transfers; Intra-day Credit Facility (ICF). - ICF: fully collateralized, interest-free, available only to banks, Islamic banks and investment banks; eligible collateral includes Malaysian Government and BNM securities and PDS with minimum credit rating ‘AAA’ deposited in RENTAS. - In January–June 2012, 14.1% of the value settled in RENTAS used liquidity from ICF. - ICF available until 4.30 PM; MyClear monitors repayment and alerts participants if unpaid by 5.30 pm. - Activity, volumes and key statistics (2011 unless otherwise stated): - RENTAS settled RM47.2 trillion in 2011, representing more than 53.5 times Malaysia’s annual GDP. - Average daily transactions: about 14,000; average daily value: RM193 billion. - Securities settlement: around 6.2% by value and 3.3% by volume of RENTAS activity. - eSPICK averages: 17.8 million cheque transactions monthly amounting to RM164.99 billion monthly; 0.84 million transactions worth RM8.05 billion daily. - Retail payment instruments (Table 1): - Cheques: Volume (in Millions) 204.9; Value (in MYR Billion) 1979.9 - Credit and Debit Transfers: Volume (in Millions) 61.8; Value (in MYR Billion) 171.6 - ATM transactions: Volume (in Millions) 215.4; Value (in MYR Billion) 69.7 - Card payments: Volume (in Millions) 342.1; Value (in MYR Billion) 95.1 - e-money: Volume (in Millions) 806.5; Value (in MYR Billion) 3.8 - Touch n’ Go: 796.8 million transactions; value 2.3 billion MYR. - Securities market snapshots: - Equities (shares traded): 329,000; Trade Value (in MYR Billions) 438 - Market capitalization 2011: MYR 1.28 trillion. - BMS participants: 35; average daily traded value MYR 1.7 billion. - BMDepo CSD accounts in 2011: 4.2 million. - Legal and operational finality: - PSA article 19(1) ensures finality and irrevocability for RENTAS payments; OPSS (art 70) requires DvP and finality on conclusion of DvP. - Assessment of Principle 8: Observed. - Observed areas for improvement (selected): - Legal Basis: explicit legal protection for collateral placed for ICF and repo arrangements could be strengthened; currently not explicit at law. - Collateral valuation: daily PDS valuation for ICF relies on quotes from principal dealers; recommendation to include Bond Pricing Agency quotes. - CSD portability/segregation: segregation arrangements should be tested; portability procedures should be tested. - Disclosure: RENTAS to comply with PFMI disclosure framework. ### RENTAS — governance, risk management, operational resilience - Governance: - MyClear board: seven members; two non-executive directors are BNM officers; internal audit department established. - MyClear KPIs evaluated quarterly. - Enterprise risk management framework in development with consultant engagement (completion expected Q4 2012). - Operational resilience and BCP: - Primary and DR sites 35 km apart; real-time replication; DR center same configuration as primary. - System uptime objective: at least 99.9% during operating hours; RTO one (1) hour; MTD two (2) hours (as described). - Participants required to conduct BCP tests at least six times a year with two tests connecting participant DR to RENTAS DR. - Mini RENTAS exists as third backup on separate infrastructure. - Recommendation: enhance participant BCP verification, include abnormal stress scenarios, consider external certification of participants’ BCP. ### BMSC — compliance profile, credit and liquidity frameworks - Observance summary (high level): - Observes 16 principles; broadly observes 2; partly observed 1; not observed 1; 4 not applicable. - Legal basis and governance: - Legal foundation: CMSA 2007, BMSC Rules, Contracts Act 1950, Evidence Act 1950, DSA 1997. - Rule-based netting/novation; independent legal opinion confirmed enforceability; suggestion to codify in law via Financial Services Act. - Assessment of Principle 1: Observed. - Financial resources and CGF (exact figures): - CGF total RM102.5 million: participants’ contribution RM17.5 million; BMSC’s contribution: MYR 25.0 million; Standby credit facility from holding company: RM60.0 million. - Intraday Credit Facilities committed by settlement banks total RM1.39 billion: - Maybank: RM1 billion - CIMB: RM190 million - Standard Chartered Bank: RM200 million (shared with Bursa Group) - BMSC cash and bank balances as at 31 December 2011: MYR 46.8 million. - Average collateral collected for SBL-CLA in 2011: MYR 3.4 million. - Stress testing and coverage: - Daily and intra-day stress tests performed; objective: meet default of participant with largest position across next three days. - 2011 average potential utilisation rate for CGF (including BM stand-by credit) to cover top one, two and three largest potential defaults: 36%, 60% and 79% respectively. - Excluding stand-by credit, CGF would be just about enough to cover default of the TCP with the largest exposure. - Stress-test scenarios include FBM KLCI movements; example sequences: - Positive movement sequence: 23.14%, -1.5%, 3.19%. - Negative movement sequence: – 20%; -11.47% ; 2.43%. - Key gaps and recommendations (selected): - Credit Risk / Margin: Partly Observed for Principle 4; recommendation to institute initial and variation margin mechanism and recast part of CGF as margin collected based on participant positions with intra-day capability. - Stress testing: enhance models to include SBL-CLA and BFF exposures; include stock-specific and forward-looking scenarios; review monthly rather than quarterly. - Liquidity risk: institute explicit liquidity stress testing model including multi-day and settlement bank unavailability scenarios; achieve RTO < 2 hours and periodically test participants’ BCPs and liquidity providers’ preparedness. - DVP arrangements: tighten to prevent scenario where securities received are used in buy-ins before final fund pay-in; enforce system controls or operational participant controls. - Long-term: migrate settlement medium from commercial bank money to central bank money in RENTAS (requires SC and BNM involvement). ### BMDepo — observance, custody, portability and operational notes - Observance summary: - Observes 11 principles; broadly observes 1; 12 principles not applicable. - Legal and operational safeguards (Principle 11): - BMDepo is approved CSD under SICDA; maintains accounts at beneficial owner level; immobilization/dematerialization mandated. - As of June 2012 / December 2011 figures in source: - New issues immobilized/dematerialized in RENTAS represent over 97.37% as of June 2012 (RENTAS context). - As of June 2012, 52.46% de-materialized, 44.91% immobilized, 2.63% paper form (RENTAS context). - As of December 2011, 99.74% of securities in existence are immobilized in the BMDepo (BMDepo context). - Compensation fund: size currently MYR50 million; insurance limit MYR 25 million; maximum compensation per claim MYR 100,000. - Portability and segregation: - BMDepo maintains beneficiary owner accounts and can transfer CSD accounts between ADIs; recommendation to periodically test portability. - Operational resilience and RTO: - BMDepo leverages BM group DR site ~10 kilometres away; business RTO was 5.5 hours at FSAP time, reduced to four hours in July 2012; decision-to-invoke DR process envisaged up to 3 hours, potentially resulting in total recovery time exceeding 7 hours. - Recommendation: enhance operational reliability to achieve RTO of 2 hours. - Assessment highlights: - Principle 11: Observed. - Principle 17: Broadly Observed (due to RTO gap vs PFMI two-hour expectation). - Principle 23: Observed; recommendation to comply with PFMI disclosure framework in short term. ### BMDC — compliance profile and key risk metrics - Observance summary: - Observed 17 principles; broadly observed 4; 3 not applicable. - Legal basis and governance: - Legal/regulatory framework: CMSA 2007, BMDC Rules, BMD Rules; rules approved by SC. - Assessment of Principle 1: Observed; recommendation to explicitly address netting/novation in law via Financial Services Act. - Financial resources and margins (exact figures as presented): - As at 31 December 2011: - Clearing Fund MYR 26 million. - Security Deposit MYR 21 million. - Direct Clearing Participant Deposit MYR 3.96 million. - Margin requirements MYR 800 million. - BMDC clearing fund composition example: Clearing Fund MYR 27.4 million (Participants' contribution MYR 22.4 million; BMDC's contribution MYR 5.0 million) — (source contains figures across sections). - Intraday overdraft and committed facilities: typical total MYR 290 million+ (specifics in source for individual banks and shared facilities). - Stress testing and coverage: - Daily and intraday stress tests run at hourly intervals starting 8.30 AM; uses historical worst-case scenarios across active products FKLI, FKB3, FCPO Spot, FCPO non-spot and FMG5. - March 2012 stress-test result: highest potential uncovered loss in extreme scenario MYR39 million. - BMDC reported resources sufficient to meet default of CPs with the two largest positions in tested scenarios. - Margin model: - Uses SPAN, aims to cover 1-day potential exposure; margin target 99.5% VaR; volatility weights over 5-day, 30-day, 90-day, 240-day combined weighted VaR. - Intraday margin triggers when erosion > 60%; CP must honor margin call within 1 hour. - Margin model review frequency: historically twice a year; post-FSAP monthly reviews instituted with full review once a year. - Liquidity arrangements and recommendations: - BMDC settles in commercial bank money via private settlement banks; settlement concentration in two banks accounts for over 70% of flows. - BMDC did not have central bank liquidity access; recommendation to consider migration to central bank money (RENTAS) in a time-bound manner. - Default management, segregation and portability: - Chapter 10 of BMDC Rules specifies default procedures; default drill executed 13-December-2012 and instituted annually; portability tested in drill. - BMDC calculates margin at client level and tested portability; recommendation to include portability testing in future drills and address gaps time-bound. - Assessments: - Principle 4 (credit risk): Broadly Observed (recommend stress test enhancements and monthly reviews). - Principle 6 (margin): Broadly Observed (recommend monthly review and full annual review). - Principle 17 (operational): Broadly Observed (RTO/decision time considerations). ### Authorities — observance of responsibilities and cooperative arrangements - Observance summary: - Authorities observe 3 responsibilities (A, B, D); broadly observe 2 (C, E). - Responsibility C (disclosure of oversight policy): - Finding: No formal mechanism for disclosing oversight policies for FMIs in securities and derivatives market; BNM’s oversight for payment systems included in annual financial stability report; recommendation to enhance coverage and delivery mechanisms. - Responsibility E (co-operative arrangements): - Finding: Existing co-operative arrangements (MOU between SC and BNM) should be fully leveraged; recommendation to enhance information sharing (e.g., concentration limits in settlement banks) and scope of collaboration; post-assessment enhancements include an enhanced MOU signed October 2012 and establishment of a focus group. - Powers and resourcing: - BNM: PSA and CBA empower oversight and designation of DPS; designated systems required to comply with CPSS / IOSCO standards and submit periodic information. - SC: SCA and CMSA empower licensing and oversight of exchanges, clearing houses, CSDs; require approvals of rules and audits. ### Prioritized, cross-FMI recommendations (selected from source) - RENTAS (RTGS, CSD, SSS) - Principle 13: periodic default management testing with participant involvement. Timeframe: Short Term. - Principle 11: articulate CSD support for portability; test portability and enhance disclosures. Timeframe: Short Term. - Principle 23: comply with disclosure framework requirements. Timeframe: Short Term. - Principle 1: strengthen legal protection for collateral and repo arrangements. Timeframe: Medium Term. - Principle 5: include Bond Pricing Agency prices for PDS collateral valuation. Timeframe: Medium Term. - Principle 17: enhance participant BCP verification; consider external certification and abnormal stress scenario tests. Timeframe: Medium Term. - BMDC - Principle 7: establish liquidity stress-testing models (simulate unavailability of banks). Timeframe: Short Term. - Principle 13: ensure periodic default drills; address gaps time-bound. Timeframe: Short Term. - Principle 14: verify and test portability in drills. Timeframe: Short Term. - Principle 1: consider legal recognition of netting/novation in law (Financial Services Act). Timeframe: Medium Term. - Principle 17: achieve RTO < 2 hours; ensure DR continuity for prolonged periods. Timeframe: Medium Term. - Principle 9: migrate settlement medium from commercial bank money to central money in RENTAS. Timeframe: Long Term. - BMSC - Principle 4 & 6: strengthen stress testing; institute initial and variation margin; recast part of CGF as margin; consider converting stand-by credit into BM contribution. Timeframe: Short Term. - Principle 7 & 17: liquidity stress testing and RTO < 2 hours; test liquidity providers’ BCPs. Timeframe: Short/Medium Term. - Principle 12: tighten DVP arrangements to prevent misuse of securities in buy-ins. Timeframe: Medium Term. - Principle 9: migrate to central bank money in RENTAS. Timeframe: Long Term. - BMDepo - Principle 11: test portability and enhance disclosures. Timeframe: Medium Term. - Principle 17: achieve RTO < 2 hours. Timeframe: Medium Term. - Principle 23: comply with disclosure framework. Timeframe: Medium Term. - Authorities - Responsibility C: SC and BNM to enhance public disclosure of oversight policies. Timeframe: Short Term. - Responsibility E: operationalize cooperation and expand scope of information exchange under enhanced MOU. Timeframe: Medium Term. ### Implementation context and authorities’ views - Observers’ comments: - Authorities note high observance levels reflect effective oversight roadmap; many recommendations implemented or in progress. - Concern that strict PFMI methodology may not fully account for domestic structural features and outcomes; advocate outcomes-based recognition and proportionality. - Specific items noted for contextual consideration: BFF usage insignificance; alternative pooled collateral systems for securities clearing argued to achieve intended margin objectives in practice. - Going forward (CMP frameworks): - CMP2 (2011–2020) priorities: straight through processing, integration of clearing/settlement with payments, reducing DvP gaps, strengthening collateral management and failed trade processes. - Planned regulatory actions: revamp Guidance on Regulatory Role of Bursa Malaysia; introduce specific FMI requirements on credit/liquidity risk, collateral management, and oversight/surveillance enhancements. *Source: IMF FSAP assessment document excerpt (RENTAS, BMSC, BMDC, BMDepo, authorities) — field missions July 2012.* ### 1. Retail Payment Instruments Usage Statistics – 2011............................................................ ### 1. Retail Payment Instruments Usage Statistics – 2011............................................................ ### Executive summary — jurisdiction, structure, and recent exercises - There is a clear demarcation of oversight, regulatory and supervision jurisdiction between the Securities Commission and the central bank. The Bank Negara Malaysia (BNM) is responsible for the oversight of the payment systems and settlement systems for unlisted government, BNM and private debt securities. The Securities Commission (SC) is responsible for the regulation, supervision and oversight of the FMIs for the corporate securities and derivatives market. - MyClear, a 100% owned subsidiary of the central bank (Bank Negara Malaysia), operates an integrated large value payment and securities settlement system – RENTAS. RENTAS functions as a Real-Time Gross Settlement System which is also integrated with a CSD and also handles securities settlement of unlisted Government, BNM and private debt securities. - Securities and derivatives clearing and settlement infrastructure is managed by an integrated exchange holding company: Bursa Malaysia Berhad (BM). Key structural elements: - BM is licensed as an exchange holding company and has a 100% owned subsidiary Bursa Malaysia Securities (BMS) (a securities exchange) and a joint venture with the Chicago Mercantile Exchange (CME) – Bursa Malaysia Derivatives (BMD) (licensed as a derivatives exchange). - Bursa Malaysia Securities Clearing (BMSC), a 100% owned subsidiary of BM, functions as a central counterparty (CCP) for the securities market. - Bursa Malaysia Derivatives Clearing (BMDC), a 100% owned subsidiary of BMD, functions as the CCP for the derivatives market. - Bursa Malaysia Depository (BMDepo), a 100% owned subsidiary of BM, functions as the lone CSD for the securities traded on the BMS. - The BM had planned a default drill well before the FSAP assessment; the default drill was proposed in January 2012 and was planned to be executed in December 2012. The assessors were notified of the successful conduct of this and also the plans to conduct this on a periodic basis. Actions taken by the FMIs and authorities subsequent to the FSAP assessment are acknowledged but are not taken into account in the assessment ratings. - The assessment was conducted in the context of field missions of the Financial Sector Assessment Program (FSAP) to Malaysia in July 2012. ### RENTAS assessment highlights and areas for improvement - Assessment approach: - RENTAS was assessed against the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) as a unified system although, from a technical standpoint, it involves the operation of three FMIs. RENTAS is highly integrated and is designated as one system. - RENTAS observes 19 principles and five principles are not applicable. - Observations and recommended improvements: - Legal Basis: The legal framework explicitly provides for finality. However the certainty of protection of collateral placed for liquidity support and protection of repo arrangements is not explicit. This is not an immediate concern given that participants using these facilities are supervised by the BNM and the BNM initiates insolvency/bankruptcy proceedings for these entities; however when other classes of entities are allowed this could be an area of concern. - Collateral: Valuation of collateral placed for intra-day credit facility which could be converted to overnight credit is based on quotes from principal dealers. This could be enhanced by seeking quotes from the Bond Pricing Agency. - CSD: Segregation arrangements for customers provided for in the legal framework should be tested and procedures for implementing portability should be tested. - Disclosure Framework: RENTAS is required to comply with relevant CPSS-IOSCO standards; with the introduction of the PFMIs RENTAS should comply with the disclosure requirements as well. ### BMSC (securities CCP) — compliance profile and main recommendations - Observance summary: - The BMSC observes 16 principles, broadly observes two, partially observed one, one principle was not observed and four principles are not applicable. - Key findings and recommendations: - Legal Basis: The legal framework for the securities market explicitly provides for finality and protection for collateral but explicitly recognizes netting and novation only at the level of rules. An independent legal opinion has confirmed enforceability of the rules; these matters could be addressed at the level of law as part of the proposed Financial Services Act. - Credit Risk: Stress testing models need enhancement and should be reviewed monthly instead of the current quarterly review schedule. - Resources for credit risk: The BMSC does not collect margins. Resources used for handling credit risk are the clearing guarantee fund (CGF), SBL-CLA collateral for SBL-CLA related exposures, and the liquid assets of the BMSC. The size of the clearing guarantee fund should be enhanced to ensure committed funds are adequate to handle the default of the participant with the largest exposure. Stress tests in 2011 indicated the committed funds would be just about sufficient; after inclusion of the stand-by credit facility from the BM defaults of the three participants with the largest exposures could be handled. - Margin: The CGF is pre-funded by participants, the BMSC and a stand-by credit arrangement from the BM. The structure and objective of the clearing fund do not fully conform to the margin methodology envisaged for the PFMIs. The BMSC should consider instituting a margin mechanism by recasting a part of the CGF as margin collected based on participant positions and by having the ability to collect variation margin on an intra-day basis. - Liquidity Risk: BMSC lacks an explicit stress testing model for assessing liquidity risk. The BMSC should institute such a model and subject it to periodic review. - Exchange of value / DVP: The DVP mechanism is achieved by placing a system-wide freeze on the CSD until the funds leg is completed. Buy-ins to address delivery failures can override the freeze, creating a potential scenario where a participant receiving securities could use those securities in a buy-in before meeting fund pay-in obligations and default on funds. This risk is mitigated by operational controls required of participants; BMSC should ensure CSD systems prevent this scenario or that market participants exercise specific operational controls to prevent it. - Default procedures: BMSC proposed a default drill in December 2012 and planned periodic drills thereafter; the assessor was notified about the successful completion. BMSC should ensure ongoing drills and address identified gaps in a time-bound manner. - Operational Reliability: BM manages Business Continuity Planning (BCP) at group level and has a stated RTO of 5.5 hours for critical function which includes depository, clearing and settlement arrangements. The BMSC does not fully test the reliability of participants' BCP procedures. ### BMDepo (central securities depository) — observance and operational notes - Observance summary: - The BMDepo observes 11 principles, broadly observes one and 12 principles are not applicable. - Key finding: - The operational reliability issue cited for the BMSC (group-level BCP and participant BCP testing) applies for the BMDepo as well. ### BMDC (derivatives CCP) — compliance profile and main recommendations - Observance summary: - The BMDC observed 17 principles, broadly observed four, and three principles were not applicable. - Key findings and recommendations: - Legal Basis, default procedures and operational reliability observations applicable to BMSC also apply to BMDC. - Credit Risk: Stress testing models need to be enhanced and reviewed monthly instead of the current quarterly schedule. - Margin: The Margin model is currently reviewed twice a year; it should be reviewed every month with a full-fledged review once a year. - Liquidity Risk: BMDC does not have an explicit stress testing model for assessing liquidity risk. BMDC should institute such a model and subject it to periodic review. ### Authorities — observance of responsibilities and cooperative arrangements - Observance summary: - The authorities observe three of the responsibilities and broadly observe two. - Key findings and recommendations: - Responsibility C (oversight policy disclosure): The authorities currently do not have a formal mechanism for disclosing their oversight policies with respect to the FMI’s for the securities and derivatives market. Oversight policies for payment systems are shared in the annual financial stability report; the extent of coverage could be enhanced and other delivery mechanisms could be considered. - Responsibility E (co-operative arrangements): Existing co-operative arrangements should be fully leveraged; the extent of information and scope of collaboration could be enhanced. Information sharing related to concentration limits in settlement banks and letters of credit could be enhanced. The scope of collaboration could be enhanced to jointly explore aspects related to FMIs on an ongoing basis. - Post-assessment initiatives acknowledged but not reflected in ratings: enhancements of stress testing scenarios and overall credit risk framework by BMSC and BMDC; institution of liquidity risk management stress tests by BMSC and BMDC; enhanced MOU between SC and BNM; establishment of a focus group to discuss co-operative oversight arrangements. ### Methodology and scope of the assessment - The present document is the assessment of systemically important financial market infrastructures in Malaysia based on the Committee for Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (PFMIs). - The assessment was conducted as part of FSAP field missions to Malaysia in July 2012. - Assessors: Harish Natarajan (World Bank) was the assessor and was supported by Isaku Endo (World Bank). - FMIs covered by the assessment: - Real Time Electronic Transfer of Funds and Securities (RENTAS) - RTGS - Real Time Electronic Transfer of Funds and Securities (RENTAS) - CSD - Real Time Electronic Transfer of Funds and Securities (RENTAS) - SSS - Bursa Malaysia Securities Clearing (BMSC) – CCP - Bursa Malaysia Derivatives Clearing (BMDC) – CCP - Bursa Malaysia Depository (BMDepo) – CSD - Note: The Bursa Bonds was not included in the scope; participants and the SC are re-working the approach for this FMI given its evolution from a trading platform to a TR. The SC is encouraged to consider an assessment of this FMI as a TR in the near future. *Source: IMF FSAP assessment document excerpt (RENTAS, BMSC, BMDC, BMDepo, authorities) — field missions July 2012.* ### 12. The links of the RENTAS with the Euroclear has not been included in the scope, as it has ### _cr1358 - 12. The links of the RENTAS with the Euroclear has not been included in the scope, as it has ### Scope, sources and methodology - The RENTAS link with Euroclear and Bank of China Malaysia (BOCM) was introduced very recently and had no usage since going live in April 2012; links were not included in the scope of key conclusions though assessment tables include remarks on the linkage. - Information used in the assessment included: - Relevant laws, rules and procedures governing the systems. - Public-domain material and information from the central bank and the securities commission. - Extensive discussions with Bank Negara Malaysia (BNM), Securities Commission of Malaysia (SC), MyClear, Bursa Malaysia, commercial banks and market participants. - A self-assessment of RENTAS against the CPSS Core Principles for Systemically Important Payment Systems and CPSS-IOSCO Recommendations for Securities Settlement Systems. - Self-assessments of BMSC and BMDC against the CPSS-IOSCO Recommendations for CCPs. - Self-assessments of BMSC and BMDepo against the CPSS-IOSCO Recommendations for Securities Settlement Systems. - Responses from authorities and operators to questions to fill gaps between self-assessments and PFMI requirements. - Methodology followed: - CPSS-IOSCO Principles for Financial market infrastructures (April 16, 2012). - Assessment methodology for Principles for FMIs (Consultative Report, April 16, 2012). - Disclosure framework for financial market infrastructures (Consultative Report April 16, 2012). ### Legal and regulatory framework - Payment systems and government securities are governed principally by: - Central Bank of Malaysia Act 2009 (CBA) — provides BNM mandate to own and operate payment and settlement systems. - Payment System Act 2003 (PSA) — strengthens payment and settlement systems oversight, designates systemically important payment systems, requires operator rules and default provisions, gives primacy to designated payment system default procedures over other legal provisions including insolvency, and requires minimum governance arrangements. - Treasury Bills Act, Loans (local) Act and Loans (local) ordinance — govern aspects of government securities, de-materialization and investor protection. - Corporate securities, equities, bonds and derivatives clearing/settlement are governed by: - Securities Commission Act (1993) (SCA) — establishes duties and arrangements for the Securities Commission. - Capital Market and Services Act 2007 (CMSA) — framework for exchanges, clearing houses, trade repositories; requires licensed exchanges and clearing houses to prioritize public interest, safety and efficiency over commercial objectives; establishes rules for participant default handling and primacy of clearing house default procedures over insolvency/bankruptcy proceedings. - Securities Industry (Central Depositories) Act 1991 (SICDA) — regulatory framework for depositories and immobilization of securities in approved depositories. - CMSA requires licensing of all participants and entities playing a role in securities markets. ### RENTAS: ownership, structure and services - Ownership and operation: - BNM owns RENTAS and has established MyClear (fully-owned subsidiary) to operate RENTAS under an SLA. - MyClear also owns/operates retail systems: Giro (inter-bank credit transfers), eSPICK (automated cheque clearing house), MyMobile (mobile payments), and FPX (online banking enabled payment system). - RENTAS is an integrated system providing: - RTGS services. - Scripless Securities Depository and Settlement System (SSDS) functioning as CSD and SSS for government securities and Private Debt Securities (PDS). - Modules: Inter-bank Fund Transfer System (IFTS), MYR Settlement Account System (MYR SAS), Foreign Currency Transfer Settlement Account System (MCT SAS), and SSDS. - Business hours for Malaysian Ringgit Settlement in RENTAS: from 8:00 am to 6:00 pm on all business days. - RENTAS functions and links: - Settles MYR transactions in real-time and on gross basis in central bank money. - Used for MYR denominated local large value credit transfers (RTGS), DVP and free-of-payment securities transfers, USD-MYR PvP via link with USD CHATS in Hong Kong, MYR-RMB PvP via link with Bank of China in Malaysia, and link with Euroclear for securities transfers/settlements for investments by RENTAS participants in securities deposited with or linked to Euroclear. - The RENTAS link with Euroclear and BOCM are very recent and had no usage since system went live in April 2012. - RENTAS access and common rules: - Functions as integrated system with a common overarching rules framework and membership agreement; module-specific rules exist. - BNM oversees RENTAS as one integrated system. - All services accessed through a common front-end and perceived by users as one integrated system. ### Membership and depository arrangements - As of June 2012 RENTAS has 68 members. Eligible regulated institutions include: - Commercial Banks (25) - Islamic Banks (16) - Investment banks co-regulated by BNM and the Securities Commission of Malaysia (15) - International Central Securities Depository (ICSD) and National Central Securities Depository (CSD) (1: Euroclear) - Central banks/monetary authorities and qualified foreign licensed institutions (1: BNM) - Qualified domestic entities that provide payment and clearing services (clearing houses) (2: MEPS, eSPICK) - Qualified institutions whose admission will promote development of Malaysian financial markets (8: Development financial institutions and others) - Authorized Depository Institutions (ADIs): - RENTAS provides customer omnibus accounts in CSD sub-component; institutions signing up are called ADIs. - Currently there are 61 ADIs. - ADIs required to open three accounts: one for ADI proprietary holdings, one omnibus account for domestic clients, one omnibus account for foreign clients. - TBA, LO and GFA require ADIs to segregate client accounts in their books; clients’ holdings are held in trust and must not be treated as holdings of the ADI. ### Liquidity sources, intra-day credit and collateral - Sources of liquidity for RENTAS transactions: - Participants opening balances. - Participant statutory reserve balances placed with BNM. - Incoming transfers. - Intra-day Credit Facility (ICF). - Intra-day Credit Facility (ICF): - Fully collateralized and interest-free. - Available only to banks, Islamic banks and investment banks. - Eligible securities: those issued by the Malaysian Government and BNM and private debt securities with a minimum credit rating of ‘AAA’ deposited in RENTAS. - Collateral accepted for ICF is aligned with those accepted for BNM standing facility and can be converted to an overnight loan under the standing facility if needed. ### Activity, volumes and key statistics - 2011 RENTAS activity: - RENTAS settled RM47.2 trillion in 2011, representing more than 53.5 times Malaysia’s annual GDP. - On average RENTAS processes about 14,000 transactions per day (stand-alone funds transfer and securities settlement transactions together) with an average daily value of RM193 billion. - Securities settlement transactions account for around 6.2% by value and 3.3% by volume. - Retail payment system statistics (2011): - eSPICK averages: 17.8 million cheque transactions monthly amounting to RM164.99 billion monthly; 0.84 million transactions worth RM8.05 billion daily. - Table 1: Retail Payment Instruments Usage Statistics - 2011 - Cheques: Volume (in Millions) 204.9; Value (in MYR Billion) 1979.9 - Credit and Debit Transfers: Volume (in Millions) 61.8; Value (in MYR Billion) 171.6 - ATM transactions: Volume (in Millions) 215.4; Value (in MYR Billion) 69.7 - Card payments: Volume (in Millions) 342.1; Value (in MYR Billion) 95.1 - e-money: Volume (in Millions) 806.5; Value (in MYR Billion) 3.8 - Touch n’ Go (largest e-money operator) processed 796.8 million transactions for a value of 2.3 billion MYR. - Securities market statistics (Table 2, 2011 approx): - Corporate Securities: Trade Volume /Market Parameter (Approx, in millions) 13600.296 - Equities (shares traded): 329,000; Trade Value (in MYR Billions) 438 - Derivatives Contracts traded: 8.05; Trade Value (in MYR Billions) - - Derivatives (Open Interest): Trade Volume /Market Parameter - ; Trade Value (in MYR Billions) 152,419 (actuals) - Bursa Malaysia market data (2011): - Market capitalization in 2011: MYR 1.28 trillion. - BMS had 35 participants; average daily traded value MYR 1.7 billion. - In 2011 there were 941 equities listed on BMS. - BMDepo had 4.2 million CSD accounts in 2011. ### Securities clearing, settlement and depository arrangements - Market structure: - Securities clearing and settlement vertically organized market-wise for bonds, equities, and derivatives. - Bonds: - Issuance through FAST (Fully Automated System for Issuing / Tendering) managed by BNM; FAST integrates with RENTAS for funds settlement and securities transfer. - Secondary bond market primarily OTC; trades must be reported to Bursa Bonds within 15 minutes. - Equities and derivatives: - Bursa Malaysia Group is holding company; Bursa Malaysia Securities (BMS) is the stock exchange; Bursa Malaysia Derivatives (BMD) is futures/options exchange (joint venture: Bursa Malaysia 75%, CME 25%). - BMSC (100% subsidiary of Bursa Malaysia Securities) functions as a CCP; settles matched trades at T+3 on a DVP model 2 basis. - BMDepo is the CSD for equities, warrants, ETFs and Sukuk traded on BMS; uses beneficial owner account structure; investors open accounts through BMDepo participants linked to participants; 4.2 million CSD accounts in 2011. - BMD trades 10 derivative products including Futures on Crude Palm Oil (FCPO) as main product; trading via CME GLOBEX; BMDC functions as CCP for derivatives. ### Oversight and regulatory powers - BNM oversight powers: - PSA and CBA empower BNM to oversee payment systems, securities settlement systems and central securities depositories for Government securities. - PSA provides enhanced oversight for designated payment systems (systemic importance or public interest). - BNM has designated RENTAS and eSPICK. - Designated systems required to comply with international standards (CPSS, IOSCO) and submit detailed information periodically. - All rules and procedures of designated systems subject to BNM approval. - BNM conducts periodic dialogue with operators and has powers to audit and call for detailed information from operators. *Source: IMF staff assessment material in the provided content unit.* ### 36. The Securities Commission Act (SCA) and the Capital Market Services Act (CMSA) ### 36. The Securities Commission Act (SCA) and the Capital Market Services Act (CMSA) ### SC oversight and institutional scope - The SCA and the CMSA empower the SC to oversee the orderly functioning of the capital market and all entities connected with it. - The SC oversees the exchanges BMS and BMD; the CCPs – BMSC and BMDC; the CSD – BM Depo. - These institutions must submit detailed information periodically and are subject to periodic audits. - All rules and procedures of these entities require SC approval. - Institutions are required to comply with international standards, in particular those issued by the CPSS and IOSCO. ### Summary assessment (high-level ratings) - RENTAS – RTGS component: Principles Observed: 1,2,3,4,5,7,8,9,12,13,15,16,17,18,20,21,22,23; Not applicable: 6,10,11,14,19,24. - RENTAS – CSD and SSS components: Principles Observed: 1,2,3,4,5,7,8,9,11,12,13,15,16,17,18,20,21,22,23; Not applicable: 6,10,14,19,24. - BMSC: Principles Observed: 1,2,3,5,8,9,12,13,14,15,16,18,20,21,22,23; Broadly observed: 7,17; Partly observed: 4; Not observed: 6; Not applicable: 10,11,19,24. - BMDepo: Principles Observed: 1,2,3,11,13,15,16,18,21,22,23; Broadly observed: 17; Not applicable: 4,5,6,7,8,9,10,12,14,19,20,24. - BMDC: Principles Observed: 1,2,3,5,8,9,10,12,13,14,15,16,18,20,21,22,23; Broadly observed: 4,6,7,17; Not applicable: 11,19,24. - Responsibilities of Authorities (Table 8): Observed A, B, D; Broadly observed C, E. ### Prioritized recommendations — cross-FMI highlights - RENTAS (RTGS, CSD and SSS) - Principle 13 (default management testing): MyClear should introduce periodic testing of default management procedures and involve participants. Timeframe: Short Term. - Principle 11 (portability): Articulate how the CSD would support portability of client holdings; enhance disclosures and test ability to support portability. Timeframe: Short term. - Principle 23 (disclosure): All FMIs should comply with the disclosure framework requirements. Timeframe: Short Term. - Principle 1 (legal protection for collateral/rep o): Strengthen legal framework to provide explicit protection for collateral placed for intra-day credit in RENTAS and for repo arrangements; replicate provisions that give primacy of default procedures over insolvency proceedings. Timeframe: Medium Term. - Principle 5 (collateral valuation): Include price information from the Bond Pricing Agency for valuation of PDS accepted as collateral for ICF; currently quotes are collected from principal dealers only. Timeframe: Medium Term. - Principle 17 (participant BCP verification): Enhance operational reliability through robust verification of participants’ BCP, including requiring external certification and testing exceptional scenarios (e.g., operational issues close to end-of-business day, unusual queue sizes, high number of requests for ICF). Timeframe: Medium Term. - BMDC (selected) - Principle 7 (liquidity stress testing): Create specific models for assessing liquidity risk beyond credit-risk-stress results, e.g., simulate unavailability of one or more banks holding liquid assets. Timeframe: Short Term. - Principle 13 (default drills): Ensure periodic default drills remain ongoing activities and address gaps in a time-bound manner. Timeframe: Short Term. - Principle 14 (segregation/portability testing): Verify and test ability to move customers’ positions from a defaulting participant to another; include in future default drills. Timeframe: Short Term. - Principle 1 (legal recognition of netting/novation): CMSA and SCA do not explicitly recognize netting and novation; provisions in PSA related to finality, netting and novation could be replicated for BMDC as part of Financial Services Act. Timeframe: Medium Term. - Principle 17 (RTO): Achieve RTO of less than two hours and ability to continue performing from DR site for prolonged periods; institute robust process to ascertain BCP effectiveness of liquidity providers and banks. Timeframe: Medium Term. - Principle 9 (settlement medium): Migrate settlement from commercial bank money to central money in RENTAS in a time-bound manner; requires active involvement of SC and BNM. Timeframe: Long Term. - BMSC (selected) - Principle 4 (stress testing / CGF): Strengthen stress testing to incorporate SBL and BFF credit risks, include stock-specific and forward-looking scenarios; consider converting stand-by credit of BM into BM contribution to CGF; evaluate relevance of BFF. Timeframe: Short Term. - Principle 6 (margining): Institute an initial and variation margin mechanism; collect a portion of participant’s contribution to CGF as margin, computed daily with intra-day ability. Timeframe: Short Term. - Principle 7 (liquidity stress testing): Create liquidity stress-testing models including multi-day and bank unavailability scenarios. Timeframe: Short Term. - Principle 12 (DVP arrangements): Tighten DVP arrangements to prevent participants receiving securities from using them in buy-ins before final delivery; institute system checks or enforce operational controls. Timeframe: Medium Term. - Principle 17 (RTO): Achieve RTO of less than two hours; periodically test BCP and ascertain effectiveness of BCPs of liquidity providers and settlement banks. Timeframe: Medium Term. - Principle 9 (settlement medium): Migrate settlement from commercial bank money to central money in RENTAS; requires SC and BNM involvement. Timeframe: Long Term. - BMDepo (selected) - Principle 11 (portability): Enhance disclosures and test ability to support portability of client holdings. Timeframe: Medium Term. - Principle 17 (RTO): Achieve RTO of less than two hours and ability to continue performing from DR site for prolonged period; periodically test. Timeframe: Medium Term. - Principle 23 (disclosure): Comply with the disclosure framework requirements. Timeframe: Medium Term. ### Recommendations for authorities (selected) - Responsibility C (Disclosure of oversight policies): The SC and the BNM could enhance their disclosure of oversight policies to the public; disclosure to FMIs is adequate. Relevant parties: SC and BNM. Timeframe: Short Term. - Responsibility E (Co-operation arrangements): Operationalize cooperation in oversight of FMIs by expanding scope of information exchange, initiating joint efforts to enhance safety, efficiency and reliability for payment and settlement systems; leverage the new MOU framework. Relevant parties: SC and BNM. Timeframe: Medium Term. ### RENTAS — detailed assessment: Principle 1 (Legal basis) - Legal framework supporting RENTAS: - Central Bank of Malaysia Act 2009 (CBA) - Payment Systems Act 2003 (PSA) - Confirmation of participation agreement (participants bind themselves to operating rules and procedures) - MyClear Operating Rules and Procedures (MORP), RENTAS Operating Procedures (ROP), Operational Procedures for Securities Settlement Systems (OPSS), operational procedures for foreign currency settlement, Central Securities Depository and Paying Agency Rules. - Evidence Act 1950, Companies Act 1965, Digital Signature Act 1997, Capital Markets and Services Act 2007, Securities Commission Act 1993. - PSA (art 6.1) enables BNM to designate payment systems posing systemic risks; RENTAS is a Designated Payment System (DPS). - Finality: PSA article 19(1) — payment instructions settled in RENTAS are final and irrevocable; PSA protects finality from bankruptcy and insolvency rules. RENTAS operating rules (art 10) deem funds transfer final once eligible for execution and picked up for execution. OPSS (art 70) requires DvP and finality on conclusion of DvP. - Netting: Rentas does not use netting; PSA art 19(2) provides for finality/irrevocability for netting; optional multilateral offsetting uses simulated netting. - Immobilization/dematerialization: OPSS requires dematerialization and deposit of BNM and Government papers; legal support cited from Loan (Local) Act 1959, Government Funding Act 1983, Treasury Bills (Local) Act 1946. Private Debt Securities/PDS immobilized via global certificates and guidelines under SCA/CMSA require deposit in RENTAS. - Repo and SBL: OPSS art 71 specifies repo rules and DvP settlement; GMRA required between participants; securities lending governed by BNM guidance notes; legal protection of repos and collateral rights not explicitly protected at law. - ICF and collateral rights: Operational Procedures art 10.1–10.12 provide BNM legal right over collateral if participants fail to repay ICF by end of day; rights over collateral and repo securities not explicitly protected at law—area of concern for repos; ICF provided only to entities supervised by BNM. - Applicability and enforceability: Participants sign Confirmation of Participation Agreement binding them to rules (Contracts Act 1950); BNM reviews all MyClear rules; participants (including foreign institutions) are subject to Malaysian law; cross-border PvP/DvP links (USD-CHATS) rely on comparable finality in Hong Kong law. - Key conclusion for Principle 1: Assessment Observed. Recommendation: BNM should consider advocating legal protections for ownership rights over collateral placed for ICF and enforcement of repo contracts in the upcoming Financial Services Act replacing the PSA. ### RENTAS — Principle 2 (Governance) - Ownership and objectives: - RENTAS owned by BNM; operated by MyClear, a 100% BNM subsidiary. - BNM’s objectives (CBA) include promoting financial stability; PSA requires operator of DPS to place high priority on safety, reliability, efficiency and compliance with CPSS and IOSCO standards. - MyClear KPIs (2012 business plan) include maintaining reliability, safety and efficiency; and expanding range of services and sustainability. KPIs are evaluated quarterly. - Governance arrangements: - MyClear board: seven members — non-Executive Chairman, five non-Executive Directors, and an Executive Director cum Managing Director; two non-Executive Directors are BNM officers (deputy governor and assistant governor); three non-executive directors are independent. - Board duties and responsibilities publicly disclosed (Section 7 MPOR; MyClear website). Quarterly and semiannual participant meetings; Rules Working Group for industry consultation. - Board committees: Audit and Risk Committee; Rules Committee; Nomination and Remuneration Committee. - Management: MyClear Management Committee (MMC) handles day-to-day operations. - Internal audit: MyClear established internal audit department; previously conducted by BNM’s audit department. - Board performance: 2011 board assessment rated performance acceptable and noted scope for improvement (board size, orientation, succession planning). - Risk governance: - MyClear has engaged consultants to develop an enterprise risk management framework (completion expected Q4 2012). - Risk management is structured and responsibilities are allocated; internal audit function established. - Key conclusion for Principle 2: Assessment Observed. MyClear is strengthening governance with ongoing initiatives. ### RENTAS — Principle 3 (Framework for comprehensive risk management) - Identified risks: credit, liquidity, operational, custody. - Tools and practices: - Periodic simulation runs and monthly BCP tests. - Participant risk-awareness programs and operational monitoring tools (RENTAS Member Computer MC and RENTAS iLINK). - FAST system provides system-wide liquidity position four times a day. - Liquidity Optimization Settlement Facility (LOSF) and mini RENTAS introduced to mitigate risks (see Principle 7 and 17 discussions). - Incentives for participants: No direct explicit incentives; MyClear provides monitoring, alerts and tools enabling participants to manage their own risks (alerts for queued transactions, ability to set alert thresholds). - Interdependencies: RENTAS settles in BNM accounts; links to USD-CHATS (PvP/DvP) and RMB settlement via BOCM with SLA; MOU with HKMA supports information exchange for USD link. - Recovery and wind-down: PSA empowers BNM to assume control; MyClear operations can be transferred seamlessly to BNM; key staff seconded from BNM; BNM can directly own and operate payment systems. - Key conclusion for Principle 3: Assessment Observed. MyClear has robust risk management policies, tools and operational frameworks; RENTAS participants have access to necessary information and tools. ### RENTAS — Principle 4 (Credit risk) - Design: RENTAS is RTGS with DVP model 1 for securities; RENTAS does not act as a CCP and thus is not exposed to participant credit risk between participants. - Intraday Credit Facility (ICF): - Interest-free, collateralized, provided by BNM. - Collateral eligibility and haircuts aligned with BNM standing facility for banks, investment banks and Islamic banks; ICF convertible to standing facility if unpaid. - ICF available only to commercial banks, Islamic banks, investment banks and Cagamas; other participants must source liquidity elsewhere. - In January–June 2012, 14.1% of the value settled in RENTAS used liquidity from ICF. - Collateral and residual risk: - Collaterals assessed as extremely low risk; robust haircuts mitigate residual exposure. - BNM may face residual exposure in extreme price volatility scenarios; mitigated by haircuts and ability to convert ICF to standing facility. - Default handling and rules: - OPSS outlines default procedures; rights to buy-in, reverse repo, sell-out and claim damages are specified. - For ICF, the RENTAS rules state BNM’s rights and obligations regarding collateral; unpaid ICF loss is borne by BNM. - Key conclusion for Principle 4: Assessment Observed. RENTAS design eliminates participant-to-participant credit risk; BNM’s ICF is collateralized and conservatively managed though residual central bank exposure exists. ### RENTAS — Principle 5 (Collateral) - Eligible collateral for ICF: - Malaysian Government Securities, BNM Securities, Private Debt Securities (PDS) with AAA domestic ratings and other securities as specified in Standing Facility Guideline. - Eligibility approved by Monetary Policy Committee (MPC); list reviewed at least annually. - Valuation and haircuts: - Haircuts determined using one-month price volatility (99% VAR based on one-month prices over a five year period), with additional haircuts 0.5% to 2% for longer maturities/type of issuer. - Collaterals valued daily based on YTM submitted by principal dealers (MGS daily; PDS once a week). - BNM assesses one-month variation over five years including 2008–9 stress period; collateral model reviewed annually. - Concentration and cross-border collateral: - BNM does not currently measure concentration of securities used as collateral; plans to introduce this shortly. - Cross-border collateral is not accepted for ICF. - Collateral management system: - Participants transfer securities into K-account (collateral account); RENTAS automatically earmarks eligible securities based on stock codes and calculates market value via FAST. - ICF available until 4.30 PM; MyClear monitors ICF repayment and alerts participants if unpaid by 5.30 pm. - Key conclusion for Principle 5: Assessment Observed. Recommendation: BNM could consider sourcing daily bond prices from the Bond Pricing Agency (BPA). ### RENTAS — Principle 7 (Liquidity risk) - Liquidity sources for participants: - Opening balances, excess statutory reserves, matured money market placements (BNM pays matured placements by 9 am), market-sourced liquidity, and ICF. - 2011 usage: 14.1% by transaction value settled using ICF; 1.06% through excess statutory reserves; remainder via balances or incoming transfers. - Tools and monitoring: - RENTAS surveillance monitors inflows/outflows, ICF use, balances, queues, pending transactions; alerts for unredeemed ICF and excessive queues. - Participants have detailed access to their transaction data via MC and iLINK. - LOSF enables multi-lateral offsetting; algorithm runs every few minutes but LOSF not widely used yet. - RMB settlement via SLA with BOCM requires BOCM to provide sufficient liquidity; USD PvP/DvP via USD-CHATS settlement bank provides intra-day overdraft and intra-day repos; participants maintain correspondent credit lines. - Liquidity resources and stress testing: - For MYR, BNM acts as liquidity provider and as central bank of issue has access to unlimited liquidity in principle; practically ICF is capped by eligible securities. - RENTAS relies on BNM for MYR liquidity; for USD/RMB legs, liquidity provided by settlement banks in those jurisdictions with oversight (HKMA/BOCM). - BNM and MyClear perform monitoring and have operational arrangements to extend operating hours if necessary (2011: 5 instances). - Key conclusion for Principle 7: Assessment Observed. Recommendation: BNM should closely monitor adequacy of liquidity risk management framework for RMB transactions when volume/value becomes significant. ### RENTAS — Principle 8 (Settlement finality) - Legal and operational finality: - PSA article 19(1) — final and irrevocable when settled as per RENTAS rules; PSA protects finality from insolvency provisions. - RENTAS operating rules (art 10) deem MYR funds transfer final once eligible for execution and picked up for execution; foreign currency rules similar (art 12). - OPSS (art 70) specifies DvP and finality on conclusion of DvP; all RENTAS securities transactions are final and irrevocable when simultaneously debited/credited. - PvP and cross-border links: - Cross-currency matching (e.g., RENTAS–USD CHATS) coordinated via CCPMP (HKICL) to ensure PvP; MYR leg final under Malaysian law and USD leg final under Hong Kong law. - Cancellation and revocation: - Securities transactions can be cancelled before settlement date subject to buyer/seller agreement; pending-payment cancellations handled by buyer from payment queue; system cancels transactions not settled by cut-off. - Funds transfer transactions in queue can be cancelled anytime except priority-marked transactions which MyClear can only cancel. - Timing: - RENTAS settles payments in real time continuously during operational day; LOSF runs multiple times per day to settle multilateral offsets; extended operating hours possible and treated equally. - Key conclusion for Principle 8: Assessment Observed. RENTAS provides clear, legally-backed points of finality intraday and in real time. *Source: IMF Financial Sector Assessment (content unit _cr1358 - 36. The Securities Commission Act (SCA) and the Capital Market Services Act (CMSA))* ### section 13.0 of the Operational Procedures for MYR Settlement in RENTAS. ### _cr1358 - section 13.0 of the Operational Procedures for MYR Settlement in RENTAS ### Settlement finality and day‑end handling - Payment orders that have been not been settled by the end of the day are removed automatically by the system. - RENTAS rules clearly define the point at which settlement is final for funds and securities transfers and this has the backing of the PSA and hence is protected at the level of law. - Final settlement is achieved in real-time upon fulfillment of the necessary conditions. - To cater for any liquidity issues participants face and other operational issues in addition to the liquidity support mechanisms, MyClear has developed a procedure by which regular operating hours may be extended to complete final settlement on a same-day basis. - In 2011 this procedure was used a total of 5 times. - MyClear rules also clearly define the point after which unsettled payments may be revoked (i.e. once the payment has been accepted for settlement it may no longer be revoked). - Assessment of Principle 8: Observed ### Principle 9: Money settlements — overview and key considerations - Principle statement: An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risks arising from the use of commercial bank money. Key consideration 9.1 — central bank money where practical and available - Description: The MYR transactions are settled in the books of the BNM. - The foreign currency transactions are settled in the books of commercial banks, the BOCM in Malaysia in the case of RMB settlement and in the books of the CHATS settlement bank in Hong Kong in the case of USD transactions. Key consideration 9.2 — use of low-risk settlement assets when not using central bank money - Description: The BOCM has entered into a SLA with MyClear which stipulates adherence to a set of operational reliability and establishment of liquidity facilities. - The BOCM is supervised by the BNM as a commercial bank and it has conducted a rigorous analysis to ascertain its suitability. - The BNM has also entered into an MOU with the China Banking Regulatory Commission (CBRC) – the home supervisor of the BOCM, which collectively provide a mechanism for the BNM to gather the views and seek co-operation of the home country supervisor of BOC. - In the case of USD transactions, the CHATS system is overseen by the HKMA. - The oversight arrangement between the HKMA and the BNM provide a mechanism for the BNM to gather the views of HKMA on the continued compliance of the CHATS systems to relevant standards and also on the stability of the settlement bank. - The HKMA also has a process of constantly reviewing the operations and suitability of the settlement bank. Key consideration 9.3 — monitoring and limiting risks from commercial settlement banks - Description: The MYR transactions are settled in central bank money in the books of the BNM. - For the USD PVP transactions, the USD leg is settled in the settlement bank of the CHATS system. The CHATS settlement bank is supervised by the HKMA and the CHATS system is also overseen by the HKMA. - In the 2009 CPSIPS assessment conducted by the HKMA, the CPSIPS principle VI is rated as observed. - The settlement bank for the RMB leg of the RMB-MYR transactions is chosen by the BNM after a rigorous analysis. - The BNM has also held extensive discussions with the CBRC the home country supervisor of the BOC. Key consideration 9.4 — FMI conducting settlements on its own books - Description: The RENTAS system conducts money settlements in the books of BNM or for the foreign currency transactions in the books of settlement banks. This key consideration hence is not applicable. Key consideration 9.5 — legal agreements with settlement banks and finality/timing of transfers - Description: The foreign currency transactions are processed through RENTAS and the MyClear rules and procedures for foreign currency transactions are applicable for these. - The rules clearly state that the transactions are settled on a PVP / DVP basis and are final when effected. Key conclusions for Principle 9 - The MYR transactions are settled in the books of the BNM. - Settling in the books of the BNM for RMB and USD transactions is not practical. - The choice of settlement banks for the RMB and USD transactions are based on sound procedures and due process and are designed to mitigate risks. - Assessment of Principle 9: Observed ### Principle 10: Physical deliveries - Assessment: Not Applicable, as RENTAS does not handle physical deliveries. ### Principle 11: Central Securities Depositories — safeguards and account structure Key consideration 11.1 — rules, procedures, controls, and reconciliation - Description: - The securities accounts in RENTAS are held electronically for each Authorized Depository Institutions (ADI); these are all commercial banks. - The securities accounts are maintained at the level of ADI and the segregation of client accounts are in the books of the ADI. - The client accounts are held un-segregated in client omnibus accounts – one each for foreign and domestic investors. - The ADI’s proprietary holdings are held in a separate account. - The RENTAS manages outstanding securities until their maturity. At this moment, securities are marked as “redeemed” in the system upon maturity. - MyClear as an agent of the BNM is the registrar for the specified securities dematerialized/immobilized in RENTAS. - All securities transfers are done through book entry. - The dematerialization of Malaysian Government Securities is supported by *Source: _cr1358 - section 13.0 of the Operational Procedures for MYR Settlement in RENTAS.* ### Section 6 of the Loan (Local) Act 1959, Section 6 of the Government Funding ### _cr1358 - Section 6 of the Loan (Local) Act 1959, Section 6 of the Government Funding Act 1983, Section 9a(3) of the GFA and Section 7(3) of the Treasury Bills (Local) Act 1946 (RENTAS / MyClear assessment) ### Securities custody, immobilisation and account safeguards (Principle 11) - Legal and regulatory basis: - Guidelines on the Offering of Private Debt Securities (PDS) and on the Offering of Islamic Securities require conventional and Islamic PDS to be deposited in RENTAS; global certificates representing PDS issuances are required to be lodged and immobilized in RENTAS. - MyClear, as RENTAS operator, issues operational rules under section 14 of PSA: MPORP, ROP, OPSS, and Central Securities Depository and Paying Agency Rules. - Operational controls and processes: - Securities created only via primary issuance in FAST (tender or private placement); tender process includes dual control approvals and automated transfer of allotment results to RENTAS for settlement and creation of holding records. - No securities can be deleted in RENTAS unless maturity reached and all holdings redeemed on a DVP basis; RENTAS enforces these controls. - Daily automatic comparison of securities in RENTAS against FAST; aggregated holdings compared to total securities outstanding; internal investigation process for discrepancies. - All audits thus far have not indicated any shortfall in securities. - Segregation and protection of customer assets: - RENTAS ADI participants must segregate their own holdings from customers’ holdings (art 9.7 OPSS); customers’ omnibus accounts further segregated into ‘Resident’ and ‘Non-Resident’. - ADI obligations (OPSS): maintain detailed internal records for each customer, employ accounting and safekeeping procedures protecting customers’ securities from ADI creditors, prohibit use of customer securities without prior written customer approval, conduct regular reconciliations, issue monthly statements, and pay coupon/interest/dividend/profit and redemption proceeds when due subject to instructions and issuer funds receipt. - All ADIs are commercial banks subject to periodic audits by BNM. - Numeric holdings and form of securities: - New issues immobilized or dematerialized in RENTAS represent over 97.37% of total securities holdings as of June 2012. - As of June 2012, 52.46% of all securities lodged in RENTAS are de-materialized, 44.91% are immobilized and 2.63% are still held in paper form. - Prohibition of overdrafts: - Operational controls and DVP-enabled settlement ensure ADIs’ securities accounts cannot go into a debit position. - Key conclusions (Principle 11): - Rights of issuers and holders adequately safeguarded; robust legal framework minimizes custody risk. - Securities holdings held at omnibus level operationally; transferability of customer accounts between custodians facilitated. - Overdrafts/debit balances prohibited; securities immobilized and maintained by book entry. - RENTAS SSS and RTGS functions segregated by personnel and systems; no other activities pose liquidity or credit risk to MyClear; BNM can seamlessly take over RENTAS if needed. - Assessment: Principle 11 — Observed - Recommendations and comments: - Address risks linked to the developing link between RENTAS and Euroclear. - Consider periodic testing of portability of client positions. ### Exchange-of-value settlement systems (Principle 12) - System support and models: - RENTAS supports securities settlement and USD-MYR and RMB-MYR PVP via links with USD CHATS (Hong Kong) and BOCM (Malaysia). - RENTAS uses DVP Model 1: securities and funds settled on a gross basis; both seller must have sufficient unencumbered securities and buyer must have sufficient cash balances (or intraday credit lines) for simultaneous transfer. - If insufficient balances, transactions queue until adequate; if not settled by RENTAS cut-off time, transaction cancelled. - PvP achieved through simultaneous transfer of MYR in RENTAS and USD in USD CHATS (and RMB via BOCM); matching for USD CHATS done by Cross Currency Payment Matching Processor (CCPMP) in RENTAS. - Key conclusions (Principle 12): - DVP and PVP processes ensured by RENTAS through system controls and interfaces. - Assessment: Principle 12 — Observed ### Participant-default rules and procedures (Principle 13) - Design implications: - RENTAS is an RTGS and uses DVP model 1 for SSS; transactions processed only when necessary funds available, preventing participant-to-participant defaults within RENTAS. - Payment orders not settled by end of day are removed from central queue. - Intraday credit facility (ICF) and related default considerations: - Participants that use ICF could fail to repay; BNM/MyClear consider such events out of RENTAS scope and as defaults on BNM monetary policy operations. - Rules on ICF grant BNM full powers to liquidate posted collateral; participants can request conversion of ICF to standing facility (currently manual; discussions underway to facilitate auto-conversion). Participants may request extension of operating hours. - Insolvency procedures: - MyClear internal procedures exist; RENTAS rules (art 5.17 to 5.30) describe handling of insolvent participants: MyClear with BNM will inventory queued and future-dated transactions and securities holdings, inform other participants, cancel pending/queued transactions, and suspend/cancel/freeze accounts in consultation with BNM. - Preparedness and testing: - Procedures for extension of cut-off times and operational failure specified (articles and sections referenced). - MyClear has developed internal procedures; rules and procedures posted on MyClear website. - Plans to consider annual simulation/testing of insolvency termination scenarios and extension of operating hours. - Key conclusions (Principle 13): - RENTAS design prevents participant defaults within system except potential ICF repayment defaults. - Rules and internal procedures in place to handle insolvency; BNM and MyClear prepared to address ICF defaults. - Assessment: Principle 13 — Observed - Recommendations and comments: - ICF provision aligned with monetary policy instruments to enable smooth transformation to overnight credit so ICF default may not invoke RENTAS default procedures. - Consider periodic testing of default management procedures and involve participants. ### General business risk (Principle 15) - Governance and risk identification: - MyClear is a 100% owned subsidiary of BNM; ensuring national payment system safety is BNM’s responsibility (CBA and PSA). - MyClear identified five main business risks: (i) poor business planning and execution; (ii) poor financial planning; (iii) legal action on negligence; (iv) risks from investments; (v) loss of key personnel. These are monitored at board level. - Financial resources and wind-down: - MyClear monitors financial performance monthly; RENTAS IT costs funded by BNM; MyClear implements/manages RENTAS application. - In the event of wind-down, BNM would take over RENTAS operations. - As at 31 May 2012, MyClear has sufficient liquid net assets to handle, at least, six months of projected operational expenses. - MyClear’s liquid net assets are in low risk investments, primarily fixed deposits and cash in BNM-licensed financial institutions. - Raising additional equity: - Board reviews and, if needed, proposes replenishment to BNM; BNM expected to support genuine need for capital. - Key conclusions (Principle 15): - BNM ownership and oversight provide strong basis for continuity; RENTAS pricing is full cost recovery; initial setup costs recouped generally in 5 years; operations have generated financial surplus historically. - Assessment: Principle 15 — Observed ### Custody and investment risks (Principle 16) - Asset locations and access: - MyClear holds its own assets in fixed deposits and other accounts in commercial banks in Malaysia; prompt access to these assets. - MyClear does not hold participants’ operational assets; collateral for ICF remains in participants’ accounts but marked as pledged and managed by BNM in RENTAS. - MyClear does not use custodian banks. - Investment strategy: - MyClear assets are low risk and readily accessible; collateral for ICF held in RENTAS and managed by BNM. - Key conclusions (Principle 16): - MyClear maintains assets as FDs in commercial banks in Malaysia and does not manage participant assets; participants’ collateral for ICF held in RENTAS and managed by BNM. - Assessment: Principle 16 — Observed ### Operational risk (Principle 17) - Operational risk framework and mitigants: - Processes include compliance with BNM supervisory expectations, self-assessment against international standards, IAD reports, RMD risk assessments, and PSP oversight by BNM. - Main operational risks: system disruptions, participant operational issues, settlement bank reliability for foreign currency transactions, personnel risks. - Single points of failure in hardware/software/network/PKI/utility providers identified and mitigated via procedures and architecture. - Infrastructure resilience and business continuity: - Full-fledged DR center 35 kilometers away; real-time data replication; DR center same configuration as primary site. - Maximum Tolerable Downtime (MTD) objective under two hours; tested monthly. - Participants required to conduct BCP tests at least six times a year with two tests connecting participant DR to RENTAS DR. - MyClear’s third backup, Mini RENTAS, runs on separate infrastructure accessible over the Internet for minimal service. - System uptime objective: at least 99.9% during RENTAS operating hours; configured high availability; RTO one (1) hour; MTD two (2) hours. - System utilization threshold set at 50%. - Testing, audits and governance: - System integration, user acceptance, pilot bank and industry-wide testing conducted prior to changes; IAD readiness audits performed; BNM reviews readiness. - MyClear IAD and BNM audits review risk management; Audit and Risk Management Committee monitors quarterly. - Security: physical controls in BNM data center, perimeter intrusion detection, CCTV, card access, biometric controls; information security policy, authentication, encryption, annual penetration testing, audit trails and log monitoring. - Demonstrated resilience: - Resilience proven by surviving January 2005 major power outage and undersea network damage to Hong Kong. - As at June 2012, all identified single points of failure mitigated. - Key conclusions and comments (Principle 17): - Robust operational risk-management framework in place; objectives defined and met; capacity tested and sufficient even during peak hours. - BCP comprehensive and regularly tested including PvP and RMB link testing. - Assessment: Principle 17 — Observed - Recommendations and comments: - Enhance BCP testing to include abnormal stress scenarios (e.g., disruption just before ICF close, unusually long queue sizes, disruptions close to closing time). - Consider external verification of participants’ BCP. ### Access and participation requirements (Principle 18) - Membership criteria and process: - RENTAS membership based on art 6.0 OP for MYR Settlement and OP for Foreign Currency Settlement; eligibility assessments consider financial soundness (sufficient liquidity/credit lines), operational expertise/resources, risk management and BCP capability, and value proposition to Malaysian market. - Application assessment: MyClear Large Value Payment Services Division → MyClear Management Committee (MMC) → notification to BNM. - Current participation and fees: - Currently 68 participants: 25 commercial banks, 16 Islamic banks, 15 investment banks, one foreign participant, 10 non-bank entities (primarily retail payment systems and government entities including provident fund and BNM). - Only banking participants have access to ICF. - Annual membership fee by class; standard per-transaction fee does not differentiate low/high volume participants. - Initial terminal set-up costs range from MYR 200,000 to MYR 400,000. - Foreign participant process and disclosure: - Foreign central bank applications require BNM approval: MyClear assessment → MMC → proposal to BNM → Payment Systems Policy Department assessment → BNM Management Committee approval (chaired by Governor). - Relevant rules and procedures publicly available on MyClear website. - Ongoing monitoring and exit: - Rules and Compliance Division monitors participant compliance; non-compliance reported to MMC and Board Rules Committee; penalties for certain breaches introduced. - Non-bank participants (not supervised by BNM) may be required to submit annual statements to MyClear. - Suspension/termination grounds: court order, BNM directive, material breaches, insolvency; MyClear must consult/obtain endorsement from BNM before suspension/termination. Procedures described in art 5.5 to 5.8 of ROP and publicly disclosed. - Key conclusions (Principle 18): - Access policies clear, transparent and risk-based; ROP details suspension/exit and voluntary termination. - Rules related to foreign participant participation not publicly available and should be considered for inclusion. - Monitoring of non-banks is limited to annual reviews and is adequate for current government/quasi-government non-bank participants; should be enhanced when other entity types become participants. - Assessment: Principle 18 — Observed - Recommendations and comments: - Consider including foreign participation rules in public documentation. - Enhance monitoring procedures for non-bank participants if participant mix changes. ### Tiered participation (Principle 19) - RENTAS does not support tiered participation arrangements. - Assessment: Principle 19 — Not Applicable ### FMI links (Principle 20) - Existing links: - RENTAS links with USD CHATS (Hong Kong) and Euroclear; Euroclear link commissioned March 2012 but had no usage and was out of scope for assessment. BOCM RMB settlement treated as a settlement bank, not an FMI. - Link with USD CHATS established following elaborate BNM internal review; risks monitored as part of MyClear risk framework. - Oversight arrangements between HKMA and BNM and between MyClear and USD CHATS operator support ongoing monitoring. - Legal basis and protections: - Systems have well-founded legal bases; RENTAS payments final and irrevocable once executed; Hong Kong law provides similar finality. - Applicability of other key considerations: - No other CSD links in scope; provisional transfers/retransfer restrictions not applicable. - RENTAS does not function as a CCP or TR; corresponding key considerations not applicable. - Key conclusions (Principle 20): - Main operational FMI link is with USD CHATS; Euroclear link exists but out of scope/no usage. - USD CHATS link established with strong mitigating measures. - Assessment: Principle 20 — Observed ### Efficiency and effectiveness (Principle 21) - Design and service evolution: - RENTAS provides RTGS gross settlement, various liquidity management and optimization mechanisms, and DVP for securities. - Recent initiatives: USD PvP and DvP link, RMB settlement, Mini-RENTAS, links with Euroclear ICSD, migration towards SWIFT messaging. - Participant engagement and satisfaction: - MyClear engages industry via discussions and customer satisfaction surveys. - 2011 survey results: over 1/3rd of respondents indicated excellent services and over 60% rated services as good. - Performance measurement and benchmarking: - Objectives captured in KPIs for senior management, derived from BNM supervisory/regulatory expectations. - BNM’s PSP department meets MyClear monthly to review performance. - Benchmarking against Hong Kong, Singapore, Norway, Sweden, USA, India and Argentina indicates RENTAS compares very well on pricing and services. - Key conclusions (Principle 21): - RENTAS is efficient operationally and financially and accommodates needs of Malaysian financial institutions and markets. - Mechanisms in place promote ongoing improvement with participants. - Assessment: Principle 21 — Observed ### Communication procedures and standards (Principle 22) - Messaging and standards: - MyClear currently uses a proprietary messaging platform based on ASCII. - RENTAS messaging was enhanced to convert into format accepted by USD CHATS. - Migration to SWIFT messaging standards underway; expected to be completed by 2014. - Communications use TCP/IP and PKI-based authentication mechanisms. - Key conclusions (Principle 22): - Currently proprietary messaging is used; migration to SWIFT planned and expected completion year 2014. - Assessment: Principle 22 — Observed ### Disclosure of rules, key procedures and market data (Principle 23) - Availability and disclosure: - System design and operations information available in MPORP (Rules), OP for MYR Settlement in RENTAS, OP for Foreign Currency Settlement; these are distributed to participants and publicly available on MyClear’s website. - Rule changes discussed at Rules Working Group with participant representation. - Payment Systems Infrastructure Development Working Group (PSIDWG) coordinates strategic infrastructural developments. - Risk disclosure and participant understanding: - Risks participants face are explained across the documents, though no single consolidated risk document exists. - MyClear provides documentation and plans periodic risk awareness sessions; Rules and Compliance Department monitors compliance and conducts training/live simulations when gaps found (example: repo to standing facility simulation with BNM). - Fees: - Fees for RENTAS services described in MPORP. - Key conclusions (Principle 23): - Clear and comprehensive rules and procedures are publicly disclosed and provided to participants. - Training and documentation provided; MyClear intends periodic risk awareness sessions. - Assessment: Principle 23 — Observed *Source: _cr1358 - Section 6 of the Loan (Local) Act 1959, Section 6 of the Government Funding Act 1983, Section 9a(3) of the GFA and Section 7(3) of the Treasury Bills (Local) Act 1946 (extracted content).* ### appendix III. These are in a format to enable easy comprehension and also ### appendix III. These are in a format to enable easy comprehension and also ### MyClear fee structure, benchmarking, and disclosure - MyClear concluded a benchmarking exercise in 2009. - Following the study, MyClear revised its fee structure by: - introducing a safekeeping fee; and - reducing the one-time depository fee to be in line with international practice. - The revised fee structure was implemented on 3 January 2012. ### Key consideration 23.5 — Disclosure - An FMI should complete regularly and disclose publicly responses to the CPSS-IOSCO Disclosure framework for FMIs. An FMI also should, at a minimum, disclose basic data on transaction volumes and values. - Description: - The current version of the Disclosure Framework was released only in mid-April 2012 and is still in consultation phase, for which reason this key consideration is deemed not applicable. - The BNM requires MyClear to conduct self-assessments against the relevant CPSS and IOSCO principles and this would include the PFMI principles. - In due course BNM would require MyClear to complete the disclosure framework. - Key conclusion(s): - The RENTAS operates transparently. - Its rules and procedures are clear and comprehensive and are fully disclosed to both the participants and to the general public. - The RENTAS design and operations as well as participants’ rights and obligations and the fee schedule and other cost details are described in the relevant rules and procedures which are also publicly available. - MyClear Rules and Compliance department monitors ongoing compliance to the rules and has a process for training participants if it identifies that a participant does not understand the rules. - Assessment of Principle 23: Observed - Recommendations and comments: - MyClear intends to complete the disclosure framework as it is required to be in compliance to the international standards. - As part of this, MyClear should clearly articulate the risks the participants are exposed to. ### VI. Detailed Assessment of the BMSC — Principle 1: Legal basis - Principle statement: An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. ### Key consideration 1.1 — Legal certainty for material aspects - Description: - The system for the clearing and settlement of securities transacted in the Bursa Malaysia Securities (BMS) exchange is handled by the Bursa Malaysia Securities Clearing Sdn Bhd (BMSC). - The law and regulations governing clearing and settlement activities in the securities markets are the Capital Markets and Services Act 2007 (CMSA) and Rules of BMSC (the Securities Clearing House) and Rules of BMS (the Securities Exchange) and the contractual agreement between BMSC and their participants. - In addition, certain aspects relating to the activities of BMSC are covered in the Evidence Act 1950 (EA), the Companies Act 1965, Digital Signature Act (DSA) 1997, Contract Act 1950 and, Securities Commission Act (SCA) 1993. - The Capital Markets and Services Act 2007 (CMSA) governs the establishment of clearing houses and contains certain provisions pertaining to the operation of clearing houses (Part II, subdivision V). The description of clearing house used in the CMSA encompasses the function of CCP and Securities Settlement Systems (SSS). - The CMSA is publicly available and accessible from the Securities Commission’s (SC) website at www.sc.com.my. - These provisions in the CMSA require the clearing house to publish rules and specify the aspects that need to be covered. In addition, BMSC’s operations as a CCP is governed by the contract it has with its participants. All participants enter into contracts as principal whether or not they are acting on behalf of client. - The BMSC also operates a Securities Borrowing and Lending under the Central Lending Agency model (SBL-CLA) where the lenders deposit the securities with the BMSC for a fee, and the BMSC lends these securities onward to borrowers against collateral. - There is another model of SBL, where the borrower and lender manage the securities borrowing arrangements bi-laterally outside the system; this is called SBL-NT. - The key aspects of the BMSC that require legal certainty given its nature as an CCP for securities market and its particular arrangements for SBL are properly provided for, as follows: - Finality: - Rule 601 and rules 801 to 804 of the BMSC rules bind the clearing participants to the open contracts in the system and all settlements are deemed final and irrevocable. - The CMSA (Sec 43) provides protection from insolvency proceedings from impacting initiation and completion of a clearing houses default procedures. - The BMSC rules specify insolvency of a participant as a condition for triggering its default procedures (Ch 4). - Netting: - Rule 5.3, 5.9 and 804 of BMSC Rules provides that the BMSC is entitled to set off any amount due from a clearing participant to the clearing house against any amount due from the clearing house to the clearing participant. - The SC had sought an independent legal opinion on the enforceability of netting in the event of insolvency of a participant while considering the revisions to the CMSA. - The independent opinion confirmed that the CMSA amendments in section 43 would protect the netting and novation arrangements. - Dematerialization: - Section 14 of the SICDA requires all securities to be dematerialized in an approved CSD. - The BMDepo is an approved CSD under the SICDA and all the securities transfers handled by the BMSC are with respect to securities dematerialized in the BMDepo. - Novation: - Rule 5.1A of the BMSC rules describes the novation process and the point of novation as the moment the market contract is accepted by the BMSC. - The default rules specified in the BMSC rules support and honour novation during the exercise of default proceedings. - Securities Borrowing and Lending (SBL): - SBL was introduced in 2007 based on the guidelines for SBL issued by the SC. - Ch 7 of BMSC Rules describes the process of SBL-CLA, the rights and responsibilities of the two parties and the BMSC. - There are separate master agreements entered into between the borrowers and the BMSC and the lenders and the BMSC. These agreements also include specific terms and conditions, including the manner in which Approved Collateral for margin shall be pledged with the BMSC. - Ch 4 of the BMSC rules (Rule B4.1 and 6.12.1) and the SBL-CLA agreement (art 13.3) taken together can be interpreted to mean that in the event of a default by the clearing participant, BMSC has the power to liquidate the collateral of the clearing participant held by the clearing house and set-off the amounts realised against any loss incurred by the clearing house in liquidating or novating the rights and obligations under the open contracts of the clearing participant in default. - The requirement to include provisions related to this is stated in the CMSA. - In the case of SBL-NT, the BMSC does not have a direct role. The agreement related to the terms of the SBL is handled outside of the BMSC between the two parties. Ch 8 of the BMSC rules provide a framework for the SBL-NT process, and very clearly articulates that the BMSC is not a party to the transaction. - Default handling procedures: - Chapter 14 of the BMSC rules specify the default handling procedures – the events that constitute default, the rights of the BMSC to implement the stated procedures and the handling of the open contracts and any pending settlements. - The rules define default broadly to include any failure of the participant to honour their financial obligations or dues to the clearing house. - The CMSA protects the implementation of the default procedures from any interference from the implementation of any insolvency procedures on the concerned participant. - Under Subdivision 6 of Part II of the CMSA, modifications to the laws of insolvency and miscellaneous provisions in relation to the default procedures of the clearing house are provided for. - In the case where the system participants are member institutions of Malaysian Deposit Insurance Corporation (MDIC), the MDIC Act 2011 provides for MDIC to assume control of the member institution, upon notification by BNM that the member institution has ceased to be viable. - The invocation of Part VII of the MDIC Act 2011 will not affect the ability of the clearing house to enforce the rules and contracts governing the legal relationship between BMSC and the system participants. - Applicability of the rules of BMSC: - In a court of law in Malaysia, a transaction made is binding based on the contractual relationship between the operator of a payment system and its participants, through the provisions in the Contracts Act 1950. - All BMSC participants have signed an agreement as a principal, which binds the participants to the relevant rules and procedures. - Legal protection for electronic payment transactions: - The DSA provides the legal framework for the use of electronic signatures. - In the court of law in Malaysia, an electronic payment transaction made is binding based on the contractual relationship between the operator of a payment system and its participants. - The EA recognizes any document produced by a computer as evidence in the court of law. - Regulation and oversight of BMSC: - BMSC is subject to regulatory oversight by the Securities Commission (“SC”). - The SC’s role to supervise and monitor the activities of any clearing house is stipulated in section 15(1)(f) of the Securities Commission Act 1993 (SCA). This encompasses the oversight and regulation of the securities and derivatives settlement system. *Source: IMF staff assessment (appendix III of the provided chapter).* ### section 38 of the CMSA, BMSC is approved by the SC, with the concurrence ### _cr1358 - section 38 of the CMSA, BMSC is approved by the SC, with the concurrence ### Legal and regulatory basis (Principle 1) - BMSC is approved by the SC, with the concurrence of the Minister of Finance, to be an approved clearing house for the regulation of services for the clearing and settlement of securities transactions (section 38 of the CMSA). - BMSC is incorporated in Malaysia as a 100% owned subsidiary of BM. Relevant jurisdiction: Malaysia only. - The BMSC rules: - Aspects relating to collection of margins, the settlement process, establishment of clearing fund, delivery procedures and financial requirements for participants are described in the BMSC rules. - Have been approved by the SC including ongoing amendments except for ones deemed to have no material impact. - Are deemed clear, understandable, enforceable and consistent with the Malaysian legal framework (assessment of the SC and BM’s external legal opinions). - Operative procedures such as novation and netting are not explicitly defined at the level of law, but the CMSA provisions relating to insolvency and requirement for approved clearing houses to specify rules provide a strong basis for enforceability. - Rules accessibility and consultation: - BMSC Rules are publicly available at the Bursa Malaysia website www.bursamalaysia.com. - Operational procedures are accessible to participants via eRAPID and are not publicly available. - A consultative panel and circular-based notifications provide participants opportunities to comment on material changes. - Key conclusion: - The legal and regulatory basis properly supports material aspects of BMSC activities in Malaysia; rules, procedures and contracts are clear, understandable and enforceable. - Assessment of Principle 1: Observed - Recommendation/comment: Potential gaps could be addressed as part of changes related to the upcoming Financial Services Act. ### Governance (Principle 2) - Corporate structure and objectives: - BMSC is a fully owned subsidiary of Bursa Malaysia (BM), a de-mutualized stock exchange holding company and public listed company. - Objectives of BMSC follow from the CMSA requiring orderly, clear and efficient clearing and settlement arrangements and prioritization of public interest over commercial interests. - Objectives recorded in memorandum and articles of association. - KPIs and performance management: - BM KPIs for 2011-12 grouped into four areas: (i) financial objectives; (ii) shareholder value; (iii) internal processes; and (iv) enhancing employee engagement and motivation levels. - BMSC KPIs derived from BM group KPIs; performance measured via scorecard and assessed quarterly, mid-yearly and annually; final annual review presented to the NRC and tabled to the SC. - Governance arrangements and board structure: - BM follows a group governance model; BMSC effectively governed through BM. - Current BM Board size: 13 directors (4 Public Interest Directors (PID), 8 Independent Non-Executive Directors (INED), 1 Executive Director cum CEO). - The 4 PIDs are appointed by the Ministry of Finance per CMSA requirements. - Board committees and composition: - Market Participants Committee (MPC): 10 members; chaired by an INED or PID; membership: three INEDs, three independent legal experts, three independent securities market experts and one derivatives market expert. - Audit Committee (AC): 5 members (four INEDs and one PID), one INED chairperson. - Risk Management Committee (RMC): 5 members, headed by a PID and comprising 3 to 4 INEDs and two or one PIDs. - Appeals Committee head is the BM Chairman (a PID). - Board evaluation: annual board performance evaluation; external consultant every 3 years; company secretary conducts intervening reviews; NRC coordinates. - Management and staffing: - Recruitment for senior positions includes interviews with senior management and CEO, Hogan Business Reasoning assessment, detailed reference checks. - BM maintains internal candidate pool in ratio of 1:2 for senior and critical positions. - Performance evaluation process in place for CEO and senior management. - Risk governance: - BM uses an Enterprise Risk Management (ERM) framework based on AS/NZS 4360; Corporate Risk Management head reports to CEO; Equities Risk Management function for BMSC has 3 staff; Internal Audit has 13 staff. - Consultation and disclosure: - Bursa Malaysia conducts consultations with participants for system, services, operations and rules changes; rule amendments require SC approval. - All rules and amendments publicly available on Bursa Malaysia’s website; operational procedures disseminated to clearing and depository participants via circulars. - Key conclusion: - Group governance model provides effective framework prioritizing efficiency and public interest; governance committees, board composition, ERM and consultative processes are in place. - Assessment of Principle 2: Observed ### Risk management framework (Principle 3) - Risk types identified for BMSC: - Credit and liquidity risks from CCP role and SBL-CLA model and Bridging Financing Facility (BFF). - Operational reliability risks that could prevent CCP functions. - General business risks largely subsumed at BM group level. - ERM and responsibilities: - BM group ERM framework (AS/NZS 4360) applied to BMSC; Corporate Risk Management responsible for framework and periodic benchmarking to ISO 31000. - Business owners identify, measure, monitor risks and implement management measures; Equities Risk Management function (3 staff) reports to CMOO. - RMC reviews risk management quarterly; internal audit reviews adequacy periodically. - Participant supervision and incentives: - Participants Supervision Department handles off-site supervision and onsite inspections; weekly, monthly and annual submission of financial indicators required. - BMSC rules and BMS rules set participant requirements and responsibilities; BMSC monitors and can impose trading restrictions (Rule 1105 of the BMS rules). - Interdependencies and third-party risks: - Entities posing material risks: participants, BMDepo, settlement banks, and banks holding BMSC funds. - BMSC has methodology for selecting banking partners using indicators such as capital adequacy ratios, credit rating and operational services; bank-wise concentration limits established. - BMDepo (BM group company) used for securities transfers and collateral custody; risks addressed at group level under ERM. - Recovery and orderly wind-down: - BM crisis management framework identifies four scenario categories: data errors, system downtimes, participant failures and operational lapses. - Business Continuity Plans in place and periodically tested. - Clearing Guarantee Fund (CGF) intended to cover default of participant with the largest position; no explicit plan for scenarios where CGF is exhausted; generally understood BM/BMS would be required to stand-in to ensure functioning. - Key conclusion: - Robust ERM framework in place; large scale participant default could impair BMSC financial resources; BMSC monitors participants and conducts daily stress testing of CGF adequacy. - Assessment of Principle 3: Observed ### Credit risk and financial resources (Principle 4) - Participant types and exposures: - Two participant types: Trading Clearing Participants (TCP) and Non-Trading Clearing Participants (NTCP). - BMSC exposures arise from CCP responsibilities, SBL-CLA securities lending (credit risk if borrower fails to return securities), and BFF (credit risk if borrower fails to repay). - Credit risk framework components: - Participant contributions to Clearing Guarantee Fund (CGF) (Ch 6, BMSC rules). - Stringent financial requirements to become a participant (Ch 11, BMSC rules) and ongoing monitoring. - Clear and enforceable default rules; right to call additional contributions and collateral; failure to honor additional contribution treated as default. - In SBL-CLA collateral valued daily with haircuts; collateral required to cover 105% of current value of stocks borrowed. - TCPs required to submit weekly information on financial and liquidity positions; BMSC runs simulations of intraday cash shortages and assesses impact against bank cash and credit facilities. - BMSC uses DVP Model2 for settlement (nets settlement amount and settles securities in gross). - Waterfall for default resources: - (i) participants’ contribution to CGF and, in SBL-CLA, borrower collateral; - (ii) BMSC’s contribution to the CGF; - (iii) CGF contributions of non-defaulting participants. - CGF structure and amounts: - Minimum fixed contribution by each clearing participant: MYR 10,000. - CGF currently set at MYR 100 million: 15% from TCPs; 25% from the BMSC; remaining as a standby credit facility from the BM. - As at 31 December 2011, BMSC financial resources include: - Cash and bank balances of BMSC: MYR 46.8 million; - SBL collaterals from TCP: MYR 3.4 million; - CGF of MYR 102.5 million: TCP’ contribution: MYR [text truncated in source]. - Risk monitoring and stress testing: - Daily monitoring and stress testing of CGF adequacy; CGF size reviewed quarterly or when ten consecutive days of daily stress testing show inadequacy to cover default of participant with largest exposure. - Key conclusion: - BMSC maintains a multi-layer prefunded resource structure (participant contributions, BMSC contribution, BM standby facility) and operational measures (collateralization, haircuts, frequent monitoring and stress testing) to manage credit exposures. - Assessment of Principle 4: Observed *Content derived from the IMF assessment in the provided PDF section.* ### 17.5 million, BMSC’s contribution: MYR 25.0 million and Standby credit ### _cr1358 - 17.5 million, BMSC’s contribution: MYR 25.0 million and Standby credit ### Financial resources, stress testing, and default coverage (Key considerations 4.5–4.7) - Structure of financial resources: - CGF of RM102.5 million: participants’ contribution: RM17.5 million; BMSC’s contribution: RM25.0 million; Standby credit facility from the holding company: RM60.0 million. - Standby credit facility is structured as a credit that will need to be re-paid by the BMSC and cannot be treated as pre-funded CGF contribution; it should be treated as an additional contingency fund. - Intraday Credit Facilities committed by settlement banks to BMSC: RM1.39 billion total: - Maybank: RM1 billion - CIMB: RM190 million - Standard Chartered Bank: RM200 million (shared with Bursa Group) - Stress testing practice: - Daily and intra-day stress tests are performed to ascertain sufficiency to handle credit risk. - Objective stated by BMSC: meet the default of the participant with largest position including all exposures across the next three days. - CGF model assumption: fund size must cover the single largest default by a participant; largest default computed by stress-testing net exposure based on historical worst case movement of the FBM KLCI. - Daily monitoring for CGF includes net exposure, netting efficiency and movement of BMS index - FBM KLCI; results reported to senior management and shared with Risk Management Committee and the SC where applicable. - Stress test outcomes and scenarios: - 2011 average potential utilisation rate for CGF (including BM stand-by credit) to cover top one, two and three largest potential defaults: 36%, 60% and 79% respectively. - Excluding the stand-by credit, the CGF would be just about enough to cover the default of the TCP with the largest exposure. - Parameters/assumptions used to stress test the CGF include: - Market volatility based on historical worst case movement of BM’s main index – FBM KLCI. - Positive movement of FBM KLCI across three days in the sequence: 23.14%, -1.5%, 3.19%. - Negative movement of FBM KLCI across three days in the sequence: – 20%; -11.47% ; 2.43%. - Participant fails to fulfill its 3 days net settlement obligations to BMSC; BMSC liquidates underlying securities; CGF to cover single largest liquidation losses. - Exposures under the SBL-CLA are not included in the stress testing; collateral collected for SBL-CLA covers 105% of MTM of the stock lent with a 30% haircut on securities collateral. - Average collateral collected for SBL-CLA in 2011: MYR 3.4 million. - Additional scenarios added post-FSAP: (i) potential BFF defaults included with worst movement of main index; (ii) movement of main sectoral indices (finance, consumer goods, plantation, realty, industrial products, trading/services) including potential BFF exposures; (iii) future event scenarios such as impact of upcoming general elections and worst 3-day movement of certain illiquid securities. - Governance and review: - If single largest liquidation losses exceed RM98 million for 10 consecutive days, BMSC will propose CGF size be reviewed subject to SC approval (Rule 6.10.3 and Section 2.1 of Risk Management Internal Procedure Manual). - Stress testing approach reviewed quarterly and full validation annually; annual review assesses: worst-case movement of other exchanges’ indices, enhanced methodologies from other exchanges, impact of new products/changes. ### Key conclusions on credit risk framework (Assessment of Principle 4: Partly Observed) - BMSC credit risk framework comprised primarily of CGF and additional collaterals for SBL-CLA; participant financial resources and position limits are monitored. - Daily stress tests validate adequacy to handle default of one participant with largest exposure. - Limitations identified: - CGF composition could be fully consumed by a single large default (entire contribution of TCPs and BMSC would be consumed). - Stress tests historically did not include potential exposure from SBL-CLA and BFF (until recently). - Size and composition of CGF might need review; stress tests should incorporate CGF + SBL-CLA collaterals + other resources. ### Recommendations on credit risk and stress testing - Expand stress testing to include: - Other market factors, specific securities, adverse movements in more than one securities product, forward-looking scenarios. - Credit risks arising from SBL and BFF including potential increased usage during stress periods. - Consider strengthening financial resources: - Convert entire or portion of stand-by credit facility into explicit BM contribution to the CGF. - Evaluate relevance of BFF given limited usage; encourage participants to use bank credit facilities instead. - Enhance stress testing to cover exposures from SBL-CLA and BFF. ### Collateral policies and practices (Principle 5 — Assessment: Observed) - Accepted collateral and haircuts: - For SBL-CLA accepted collateral includes cash, approved securities traded in BMS, prescribed bank guarantee/letter of credit and foreign currencies; currently all collateral placed is cash in local currency. - Collateral must cover 105% of value of stocks borrowed; securities collateral haircut: 30% (largest single day fall possible given circuit-breaker rules) plus the implicit 5% via 105% coverage. - Securities accepted as collateral: 102 securities (last reviewed February 2012), criteria: (i) Top 100 securities by volume meeting: average market capitalisation ≥ RM500 million for past 3 months, average monthly volume ≥ 1 million for past 1 year, public float ≥ RM50 million; or (ii) securities that form part of FBM KLCI. - SBL-CLA collateral policies reviewed twice a year by Equity Risk Management. - Concentration limits: - Total bank guarantee < 30% of BM’s shareholder funds. - Securities should constitute only 30% of collaterals accepted for SBL-CLA. - None of the securities should have > 30% of overall securities component of collateral or 30 million MYR whichever is higher. - No concentration limits for cash collaterals. - Cross-border collateral: - BMSC does not accept cross-border collateral; accepted foreign currency collateral is held in Malaysian banks. - Collateral management: - Collateral records kept within BMSC’s clearing & settlement system; managed by BMSC staff under SOPs; audited (SC audit in 2009). - Recommendation: - Consider instituting concentration limits for foreign currency and encourage adoption of MGS for collateral. ### Margin framework (Principle 6 — Assessment: Not Observed) - CGF design and limitations: - CGF is pre-funded and comprises fixed and variable contributions (variable proportional to participant trading value share). - CGF structured to cover 3-day exposure of participant with largest exposure but does not strictly qualify as margin: - Can be used to settle defaults of other participants. - Not structured to cover each participant’s current and future exposures with 99% confidence. - Daily stress testing is not equivalent to back-testing; increasing CGF requires SC approval (not automatic). - Final conclusion: - BMSC should institute initial and variation margin mechanism in short term. - A portion of participants’ contribution to CGF could be considered as margin and collected based on specific risk assessment daily and intra-day. ### Liquidity risk management (Principle 7 — Assessment: Broadly Observed) - Liquidity exposures and measurements: - Liquidity risk sources: CCP role and BFF provider role. - From June 2012 stress test: highest potential uncovered loss following default of single largest participant in extreme market scenario: MYR 29.8 million. - 2011 average largest participant exposure: around MYR 36 million. - July 2011–June 2012: largest exposure MYR 388.5 million; average exposure MYR 69.55 million. - BFF: any TCP can request BFF for MYR 10 million; maximum outstanding per TCP over 3 days: MYR 20 million; BFF usage very limited (one instance in 2011). - Available liquidity resources (reflective of a typical day as of 31 December 2011): - CGF of RM102.5 million (participants RM17.5 million; BMSC RM25.0 million; standby credit facility RM60.0 million) - Intraday Credit Facilities of RM1.39 billion (Maybank RM1 billion; CIMB RM190 million; Standard Chartered Bank RM200 million) - Cash and bank balances of BMSC: RM46.8 million - Practices and gaps: - Daily liquidity forecasting and use of daily stress test results to verify adequacy. - Lacks a dedicated liquidity stress testing framework; no access to BNM liquidity support; uses short-term deposits in strong local banks and intraday credit facilities. - Does not have established process of testing banks’ ability to provide intraday credit facilities (relies on ongoing relationships and supervisory oversight). - Recommendations: - Institute separate liquidity stress test model including scenarios such as operational failures at settlement banks, inability to use credit lines, and spillovers from other markets (e.g., BMDC). ### Settlement finality and money settlements (Principles 8 and 9 — Assessments: Observed) - Settlement finality (Principle 8): - T+3 rolling settlement. Funds pay-ins received into BMSC accounts; pay-ins schedule for funds leg: 10.00 a.m. on settlement days; payments are irrevocable upon crediting BMSC’s account or participant bank accounts. - Title to securities passes upon full payment (Rule 5.7A); enforceability protected by section 53(3) of the CMSA. - Daily settlements completed at 10 AM and deemed final once funds are credited. - Money settlements (Principle 9): - BMSC uses private settlement bank model (historically 3 settlement banks: CIMB, Maybank, Standard Chartered); recently allowed participants to choose settlement banks subject to BMSC approval. - Criteria for settlement banks: licensed by BNM; real time online banking; intraday facility; meet payment cut-off times; credit standing minimum A (RAM), BBB and C (S&P) as applicable. - 2011 settlement concentration across three banks: 15.31% CIMB, 41.56% Maybank, 43.13% Standard Chartered Bank; measures initiated to diversify. - BMSC does not have legal agreements with settlement banks specifically for settlement process beyond standard banking customer agreements. - Recommendation: - Consider time-bound migration from settlement in commercial bank money to central bank money (coordination among BMSC, BMDC, SC and BNM). ### Delivery versus Payment and DvP model (Principle 12 — Assessment: Observed) - BMSC uses DvP Model 2: - Funds leg settled net at 10 AM; securities leg settled gross 1–2 hours before 10 AM for FDSS and just before 10 AM for ISS. - BMDepo places a system-wide freeze on securities transfers until 10 AM to prevent withdrawal/transfer before funds leg completion; exception for force buy-in. - Rules empower market participants to block clients from transacting on securities if settlement obligations unmet (BMS rule 601.6). - Failed trades by value and volume over last 3 years: less than 0.02%. - Recommendation: - Consider system controls to tag securities transferred during settlement day to prevent their use for buy-in (system change in BMDepo or enforcement by market participants). ### Participant-default rules and replenishment (Principle 13) - Default definitions and powers: - Chapter 4 Rule 4.1 lists defaults: non-payment, insolvency, SC license cancellation, failure to meet financial requirements. - Rule 4.2: BMSC actions upon default include notifying participants, settling novated contracts, computing net dues/surplus, using TCP resources and clawing back securities transfers, and using CGF; if surplus exists, release liened properties; prepare report including net sum payable/due to SC. - Use and replenishment of CGF: - Chapter 6 sequence for using CGF: use failing participant’s contribution first, then BMSC’s contribution, then contribution of other non-defaulting participants. - BMSC retains claims against defaulting TCP for any sums used from CGF. - Rule 6.14 and CGF Operational Procedures prescribe right of BMSC to require participants to promptly replenish CGF that are exhausted during a stress event; failure to honor replenishment request is itself a default under Chapter 4. - Assessment: - Default rules and replenishment powers are clearly set out in BMSC rules and supported by regulatory framework. *Source: IMF staff report content from the supplied PDF content unit.* ### Section 43 of the CMSA provides for the default proceeding by the clearing ### _cr1358 - Section 43 of the CMSA provides for the default proceeding by the clearing ### Default management framework and sequence of resource use - Section 43 of the CMSA provides for the default proceeding by the clearing house to take precedence over the Law of Insolvency. - The internal procedures developed by the BMSC list the following sequence of using the financial resources to handle the default: - (i) use intra-day credit facilities to complete the settlement of novated contracts and execute buy-in in case of securities shortfall; - (ii) contact the defaulting TCP to arrange for necessary funds, if not arranged constitute Default Management Committee; - (iii) use the CGF in the order specified in the Ch 6; - (iv) if CGF insufficient claw-back securities from the days settlement to off-set dues; and, - (v) claw-back securities from TCPs proprietary transactions. If there are still outstanding dues, file a claim. ### Default Management Procedure: roles and steps - The BMSC has developed a Default Management Procedure describing roles, obligations, and responsibilities, including non-defaulting participants. - The first step is for the Default Management Committee (DMC) to convene. Roles defined include: - Declaration of default by Chairman of DMC (Default Management Committee) - Suspension of accounts by the BMDepo - Selection and liquidation of securities by risk management and approved by Chairman of DMC - Panel of non-defaulting participants to assist in the liquidation process - Payment of CGF/ other financial resources by Finance - Non-defaulting participants to replenish the CGF upon notification by risk management - Communication and press release by Default Recovery Management Committee (DRMT) - Default handling procedures are reviewed when there are significant local or international developments. - In the aftermath of the recent failure of a large commodity clearing house participants in the USA (MF Global) both the BMSC and the BMDC reviewed its default handling procedures and now intend to conduct a default handling drill. ### Protection of participants’ customers (BMDepo) - The interests of the participant’s customers are protected by the BMDepo under Rule 3.01(1)(h) and 3.02(2) of rules of BMDepo. - Procedures to be followed by the BMDepo in the event of a participant default include: - (i) Establish Task Force Team to monitor CSD operations of the defaulting ADA while waiting for special administrator to be appointed; - (ii) Special administrator to take over the task of overseeing the CSD operations; - (iii) Identify new ADA to take over the CSD accounts of the depositors; and, - (iv) Transfer all CSD accounts to the new ADA - The BMSC has powers to access all relevant systems and book of accounts of the defaulting participant [Rule 2.11(b) of BMSC rules] to assist the defaulting participant’s customers. - TCPs are required, as part of periodic reporting and under the CMSA, to confirm segregation of client accounts. ### Public disclosure of default rules and procedures - Relevant rules and procedures are posted on the website of the Bursa Malaysia and are also available to the TCPs through the eRapid system for distribution of any changes by way of circulars. ### Testing, review, and drills - The BMSC involves participants on a one-on-one basis to discuss risk controls and default handling procedures. - A default drill was scheduled for August 2012; post-FSAP the drill was conducted and scheduled to be executed annually. - The completed default drill included the following scenarios: - i) test the BMSC’s default procedures with a broker and other relevant departments within BMSC; - ii) identify the market participant’s relevant CSD accounts of the affected T+3 purchase trades; and - iii) the claw back of securities and other recovery procedures required. - The assessor was notified that the drill was completed with no adverse findings. ### Key conclusions, assessment, and recommendation - Key conclusion(s): - The BMSC has established a default management procedure which identifies the roles and responsibilities of the various stakeholders. - The rules related to the default management are clearly specified in the BMSC rules and these have the backing of the CMSA. - The rules provide ample powers and flexibility to the BMSC in handling defaults. - The default management procedures are reviewed based on any significant domestic or international events. - The BMSC along with the BMDC had scheduled a default drill which was subsequently conducted with no adverse findings. - Assessment of Principle 13: Observed - Recommendation and comment: - The BMSC should ensure the default drill is a periodic arrangement and it should use this to assess its readiness to manage the default management procedure. ### Segregation and portability (Principle 14 introduction) - Principle 14 statement: A CCP should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions. - Key consideration 14.1 (statement): A CCP should, at a minimum, have segregation and portability arrangements that effectively protect a participant’s customers’ positions and related collateral from the default or insolvency of that participant. If the CCP additionally offers protection of such customer positions and collateral against the concurrent default of the participant and a fellow customer, the CCP should take steps to ensure that such protection is effective. - Description (partial): The BMSC does not manage funds and collaterals of participant’s clients. *Source: _cr1358 - Section 43 of the CMSA provides for the default proceeding by the clearing* ### part III, division 4 of the CMSA lays out the requirements for segregating [sec ### _cr1358 - part III, division 4 of the CMSA lays out the requirements for segregating [sec ### Segregation and portability of client positions and collateral (Principle 14) - Legal and rule framework - Part III, division 4 of the CMSA sets requirements for segregating client assets [sec 111 and 118] and safeguarding client positions by all market participants [sec 112-117]. - CMSA requires all securities and funds paid in or to be received by clients to be deposited into their segregated accounts no later than one day of the event [sec 111 (1) and 118 (1)]. - BMSC rules require market participants to segregate client positions and funds; compliance is assessed as part of market participant supervision at the BM group level. - BMDepo maintains securities accounts at the beneficial owner level. - Operational practice and scope - BMSC does not collect collateral and margins from TCPs for normal securities market transactions; BMSC collects collateral only for SBL-CLA transactions and requires SBL-CLA transactions to be entered in as a principal, so collaterals are collected from the TCP and reflected as the TCP’s collateral. - SBL-CLA rules (Ch 7 of BMSC rules) specify permitted situations for SBL-CLA and require explicit arrangements to address known securities short-falls and for entities designated as market-makers of ETFs. - Rule 608.7(2) and Rule 703.10 require participating organizations to segregate client accounts including collateral and margin from the participating organization and from other customers; Section 118 of the CMSA requires this as well. - Rule 404.3(11) of the Rules of BMS imposes an overriding requirement on participants to ensure customers' assets are adequately safeguarded. - Key conclusions and assessment - The BMSC does not manage client funds and securities; participants manage these. CMSA and BMSC rules require participants to ensure segregation of client funds, securities and collaterals. Compliance is verified via internal supervision of the BM and by the SC. - BMDepo holds securities accounts at beneficial owner level and provides portability of client securities from one participant to another; BMSC relies on BMDepo for segregation and portability of securities positions. - BMSC treats collateral for SBL-CLA as that of the TCP and does not have portability arrangements for such collateral. - Assessment of Principle 14: Observed (with recommendations). - Recommendations and comments - The BMSC should include verification of its continued ability to assist movement of customer positions from a defaulting participant to another as part of its testing of default procedures. (Refer also to recommendations under Principle 13.) ### General business risk (Principle 15) - Risk identification and governance - General business risks are identified through the ERM framework used at the BM group level; identified business risks include competition risk, talent management risk, wrong business strategy or wrong execution, business interruption, reputational risk, economic risks, non-compliance to regulatory requirements and litigation risk. - BM group has established group governance and a robust risk management framework used for business risk management. - Liquidity and equity resources - As of December 2011, the BMSC has enough liquid net assets funded by equity to support one year’s operational expenses. - The BM group policy maintains net liquid assets funded by equity to cover more than six months operating expenses; these are held in bank deposits with maturity period of not more than three months. - Adequacy of liquid funds is reviewed on a half-yearly basis. - Recovery / wind-down planning - BMSC is a 100% owned subsidiary of the BM. BMS (also 100% owned by BM) is required by the CMSA to ensure orderly arrangements for clearing and settlement; responsibility folds up to BM. No explicit plan exists for BMSC wind-down or alternative arrangements, although BM is responsible for ensuring alternative arrangements. - As of December 2011, BMSC has enough liquid net assets funded by equity to support one year’s operational expenses. (Note repeated statement in source.) - Asset quality and liquidity - BM, BMSC, BMDepo and BMDC assets are held in fixed deposits and money market placements with approved financial institutions and liquid debt securities rated ‘AA’ and above by local rating agencies. - In practice, 80% of its funds are invested in money market deposits. - Equity-raising contingency - Given BMSC is wholly owned by BM, the holding company is available to inject equity capital into BMSC. BM, being listed, may raise funds via capital markets for injection. There is no explicit plan for raising additional equity for BMSC at the moment. - Key conclusions and assessment - BMSC leverages BM group ERM and governance. BMSC has liquid net assets funded by equity to cover over six months of operational expenses, maintained in bank deposits and money market instruments, but lacks explicit plans for recovery/wind-down and for raising additional equity if required. - Assessment of Principle 15: Observed. - Recommendations and comments - Establish explicit recovery or wind-down plans for BMSC, and formalize plans for raising additional equity if BMSC equity approaches required levels. ### Custody and investment risks (Principle 16) - Custody and holdings - BMSC holds its cash assets as deposits in banks and debt securities; around 80% of BMSC’s assets are held in current accounts or deposits in banks. - CGF and any other funds collected from TCPs are held in bank deposits. - Collateral for SBL-CLA is held in BMDepo; collateral collected for SBL-CLA is, in normal course, not used by BMSC. - Investment policy and limits - Investment policy sets qualitative criteria for financial institutions and exposure limits per bank; investments are diversified across multiple banks; panel banks and exposure limits are reviewed annually or as necessary. - Investment in debt securities must be rated ‘AA’ and above by local rating agencies. - Access and promptness - BMSC has prompt access to assets held in commercial banks or debt securities in Malaysia. Equity collateral for SBL-CLA is held in BMDepo. - Key conclusions and assessment - BMSC maintains participant assets in FDs and other bank accounts in Malaysia; participant collateral for SBL-CLA is held in BMDepo. BMSC’s own assets are held in banks in current accounts or fixed deposits and debt securities. - Assessment of Principle 16: Observed. - Recommendations and comments - No specific additional recommendations recorded in the provided text. ### Operational risk (Principle 17) - Operational risk framework and oversight - Operational risk is managed by the Corporate Risk Management Group for the whole Bursa group via an ERM framework. Risk assessment identifies major processes, rates likelihood and impact, and documents controls and action plans. - Identified operational risks include business interruption, physical security, information security, fraud, operational errors, and service provider related risks. - The Risk Management Committee (RMC) of the Bursa board oversees risk management for group institutions including BMSC; RMC meets at least four times a year. - Internal audit conducts periodic audits; examples between 2009 and 2011 include Equities funds settlement (April 2009), Securities clearing & settlement functions (June 2010), Securities risk management (August 2011), and IT audits related to configuration/change/system administration. - Business continuity and testing - BCP simulation for BMSC carried out in November 2011. - Bursa group’s backup site is in Damansara Heights, Kuala Lumpur, around 10 kilometres from main site; sites use different power and communication providers and sub-stations and telecom exchanges; online data replication exists from main site to DR site. - BCP tested at least once a year; BCP tests include participation of BMSC participants who must connect to BM’s DR site and verify service and data integrity; recalibrations and re-tests are performed if required. - Recovery Time Objective (RTO) for critical and essential systems was set at 5.5 hours and was subsequently changed to four hours in July 2012. - BMSC, BMDC and BMDepo are classified as “Critical Systems (stage 2)” to be recovered after “Critical (Stage 1)”. - BCP tests achieved business recovery times: less than two hours on two occasions and three hours and 15 minutes on one instance. - The BM concluded current RTOs are sufficient to ensure clearing and settlement completion by end of day if disruption occurs during end-of-day process. Trade details are available for download by 8 PM on the T day; settlement obligations are available at beginning of day on T+3. Settlement obligations info is generated by end-of-day process on T+2 which typically runs from 9.30-11.30 PM on T+2. - A three hour time window is envisaged from occurrence of an event till decision on how to handle the event is taken. System recovery time is restoration at backup site; business recovery time is system recovery time plus one hour for mobilizing staff and other time required to fully recover the business function. - Capacity, security and monitoring - BM IT team monitors system capacity utilization daily; in October 2011 average capacity utilization was 50%. All new systems undergo stress tests. - BM group information security management systems certified under ISO 27001:2005; data center access restricted and monitored with CCTV. - Bursa group uses ITIL for IT management and PMI methodology for project management. - Interdependencies and participant arrangements - Operational risks related to BMDepo, settlement banks and participants can affect BMSC; BMDepo holds all securities accounts and records collaterals; settlement banks effect funds settlement. - Bursa requires participants to maintain robust BCP; this is verified via ongoing supervision and onsite audits of participants’ DR sites; participants are required to participate in BM BCP tests. - Ability to provide online banking facilities is a criterion for selecting settlement banks and liquidity providers. - Key conclusions and assessment - BMSC leverages Bursa Group ERM and group-wide DR site 10 kilometres away; BCP tested annually with stakeholder participation and target RTO of 4 hours from disaster declaration. - The PFMI standard requires recovery of FMI functions within two hours of disruption. In BM terminology that two hours would include event assessment and declaration plus business recovery; current stated RTO equates to around 7 hours (three hours for decision making and four hours for business recovery). - BMSC does not assess BCP preparedness of settlement banks and liquidity providers; those banks are supervised by BNM and their BCP is monitored by BNM, not by BMSC. - Assessment of Principle 17: Broadly Observed. - Recommendations and comments - Enhance operational reliability measures: - Institute RTO of 2 hours. - Strengthen BCP process to include testing of BCP arrangements of participants and settlement banks within overall BCP testing and include simulation of operational impact in the midst of the clearing and settlement function (e.g., early-day disruption and inability of one or more settlement banks/liquidity providers to provide services). ### Access and participation requirements (Principle 18) - Membership structure and access - BMSC members comprise Trading Clearing Participant (TCP) and Non Trading Clearing Participant (NTCP). - TCPs are BMS members that introduce trades into the exchange and clear and settle trades through membership in BMSC. - NTCPs are custodians who manage funds and securities of clients and, upon client instruction, settle customer trades conducted through a TCP directly with BMSC; TCP hands over such trades to the involved NTCP and both parties inform BMSC. - All TCPs and NTCPs need to be members of BMDepo, as all client accounts are tied to a TCP and, where relevant, an NTCP. - Rules for becoming a participant in BMSC and BMDepo are stated in Chapter 2 of BMSC rules and Part II Chapter 2.0 and Part III (text truncated in source). - Key conclusions - BMSC has objective, risk-based participation categories (TCP and NTCP) and requires BMDepo membership to link client accounts to participants. *Source: Excerpt from IMF staff report (_cr1358), sections on segregation, Principles 14–18, and related descriptions and conclusions.* ### Chapter 14 of BMDepo rules. These rules are available on Bursa Malaysia’s ### _cr1358 - Chapter 14 of BMDepo rules. These rules are available on Bursa Malaysia’s ### Participation requirements and eligibility (Principle 18) - TCPs are required to be members of the BMS as a Participating Organization (PO). - BMSC rules state financial requirements for TCP participation should be the same as for a PO in the BMS rules. - NTCPs have the same financial and membership requirements as TCPs except that only entities that function as a unit trust, custodian, and investment bank or have been explicitly allowed by the SC to provide investment services can be a NTCP. - TCPs can be investment banks or any other institution that meets the financial requirements. - Investment banks are regulated jointly by the SC and the BNM; BNM specifies capital requirements and distinguishes between investment banks that are part of a banking group and stand-alone investment banks, with different capital required for each category. - BMS rules for PO do not specify specific financial requirements for investment banks, as they are covered under BNM and SC guidelines. Key rules for non-investment bank TCPs (Ch 11, BMS rules): - Capital adequacy framework is risk-based and participants are required to compute this on a daily basis. - Participants must ensure that the Capital Adequacy ratio is above the prescribed minimum ratio of 1.20. - Participants are required to maintain minimum shareholders’ funds (unimpaired by losses) of at least RM20 million [Rule 1101 of BMS Rules]. - Higher shareholders’ funds requirement applies to TCPs who provide additional services beyond pure broking services. Operational minimums (Ch 3 & 4, BMS rules): - Availability of trained personnel. - Data processing capacity. - Operational reliability measures. - Effective risk management measures. Description / justification (Key consideration 18.2): - Participation requirements are primarily based on financial requirements to support BMSC risk management and orderly market development. - Differing requirements for investment banks (per BNM and SC) and non-investment banks take into account institution-specific risks. - BMS used an approach aligned with BNM and SC for non-investment bank TCPs, developed with assistance of a consulting company. - Access restrictions and requirements are reviewed with consultation of the SC; any changes to participation rules are reviewed by the SC. - Participation rules are publicly available on Bursa Malaysia’s website. Assessment of Principle 18: Observed ### Ongoing monitoring, reporting, and exit procedures (Key consideration 18.3) Monitoring framework: - BM monitors ongoing compliance of participants on a group basis via a separate 24 member unit. - Applies to participants of the exchanges, the clearing houses, and the depository. - Combines off-site supervision (data collection) and on-site inspections. - On-site inspection frequency guided by a risk-based profile; generally each PO is subject to on-site inspections at least once in 3 years; higher risk profiles audited more frequently. Scope of supervision: - Verifies participants’ ability to meet payment obligations, risk management policies, management supervision, compliance to rules, staffing, internal audit, and IT system security. - Compliance head of a participating organization must report any violation of rules to the BMS or the BMD as applicable. Reporting requirements (frequency preserved as in source): - Capital adequacy ratio: daily basis. - Liquidity position, Adjusted net capital and risk analysis of client positions: weekly basis. - Profit and loss statement, statement about compliance to the segregation requirement and details of the segregated positions: (frequency implied in context of reporting). - Additional reporting related to errors, under-margining for SBL by clients, etc. Exit procedures and powers: - BMS rules [301.4] require the BMS to consult with the BMSC before accepting a PO termination request. - BMSC rules 2.12 and 2.14 require a participant to provide at least 30 days’ notice and give the BMSC discretionary powers to reject the request if it could pose problems to the orderly functioning of the clearing house. - Rules provide BMSC powers to place specific restrictions on the participant in the intervening period to ensure smooth processing of termination. - Involuntary exit processes are described in Ch 4 of the BMSC rules and analyzed in PFMI 13. Key conclusion(s): - Access policies and requirements are clear, transparent, and risk based. - Access policy and ongoing supervision are managed at the Bursa group level with institution-specific requirements addressed in respective rules. Recommendations and comments: (as provided in source) ### Tiered participation arrangements (Principle 19) - Assessment: Not Applicable. - Recommendation/Comment: BMSC does not support tiered participation arrangements. ### FMI links (Principle 20) Description of linkages: - The only link the BMSC has with other FMIs is with the BMDepo for settlement of securities and depositing equity collaterals collected from the CPs. - An operational failure in BMDepo will impact the BMSC as it would not be able to complete the securities settlement processes. - Operational risks from this linkage are included in the overall operational reliability planning of the Bursa group. Legal basis for links (Key consideration 20.2): - BMDepo and the BMSC are licensed pursuant to the SICDA and the CMSA respectively. - Operational rules of these FMIs describe the linkages and operational procedures; these rules have the backing of the SICDA and the CMSA. Other key considerations (20.7, 20.8, 20.9): Not Applicable. Key conclusion(s): - The only FMI link is between BMSC and BMDepo; both are operated from the same infrastructure and are part of the same holding company. - These FMIs have a sound legal basis as discussed in PFMI 1 assessments. Assessment of Principle 20: Observed ### Efficiency and effectiveness (Principle 21) Effectiveness assessment methods: - Annual customer satisfaction survey. - Extensive consultation with participants and with the SC prior to new changes/enhancements. - Periodic benchmarking of services and fees with regional clearing houses (e.g., Hong Kong and Singapore). - Recent enhancement: matching features in the ISS enabling system-based matching of TCP and NTCP confirmations to use ISS resulted from benchmarking. Goals and KPIs (Key consideration 21.2): Goals: - To process, execute and complete all clearing and settlement activities in a timely manner, in accordance with the prescribed procedures, rules, guidelines and directives. - To provide an efficient, reliable and stable clearing and settlement infrastructure. - To ensure adequate risk management measures, including monitoring participant’s ability to meet settlement obligations, effective handling of default and adequacy of financial resources. - KPIs established at organization and personnel levels. Mechanisms for regular review (Key consideration 21.3): - Feedback via annual survey and periodic consultations. - Targets for operational indicators: - Time taken to complete trade processing. - Adherence to cut-off times. - System availability. - Post-implementation reviews for new initiatives, involving participant consultation; SC requires such reviews for SC-approved projects. Review reports are tabled to management. Key conclusion(s): - BMSC has processes to ensure efficiency and to meet participant needs; participants interviewed expressed satisfaction. Assessment of Principle 21: Observed ### Communication procedures and standards (Principle 22) Current practice (Key consideration 22.1): - BMSC uses a proprietary message format. - System interfaces use industry standard protocols like TCP/IP. - Proprietary message formats are used for exchanging securities transfer instructions with BMDepo and for receipt of ISS confirmations from NTCPs; other participant interactions are through system screens using industry standard protocols. Key conclusion(s): - BMSC accommodates industry-standard protocols (TCP/IP) though it uses proprietary message formats for certain exchanges. Assessment of Principle 22: Observed ### Disclosure of rules, procedures and market data (Principle 23) Publication and availability (Key consideration 23.1): - Operational procedures and circulars issued by BMSC are made available to clearing participants through eRapid. - BMSC and BMS rules are posted on the Bursa Malaysia website. System design and participant rights (Key consideration 23.2): - System design and operations specified in the Technical Architecture Design and Operational Run Chart; provided to participants and their vendors upon completion of a Non-Disclosure Agreement (NDA). - Technical documents on system processes and designs are sent to participants through circulars. - Fees and charges provided to all new participants; changes notified through circulars. - Governance model and disclosures on BMSC risks are provided in Bursa Malaysia’s annual report available on Bursa Malaysia’s website. - BMSC has published its self-assessment against the RSSS. Training and documentation (Key consideration 23.3): - All new participants are provided requisite training on systems, processes and rules. - Ongoing supervision identifies knowledge gaps; based on discussions, suitable actions (including additional training) are determined. - Refresher training provided as needed. Fees and discounts (Key consideration 23.4): - Fees charged by BMSC and BMDepo are communicated via the rules of BMSC and BMDepo or circulars. - Since fees are prescribed, Bursa does not offer further discounts; if any discounts are offered they will be consistently applied to all future similar cases. Disclosure framework and transaction data (Key consideration 23.5): - The current version of the Disclosure Framework was released only in mid-April 2012 and is still in consultation phase; this key consideration is deemed not applicable. - The SC requires BMSC to comply with international standards; BMSC is preparing to comply with this requirement. Key conclusion(s): - BMSC operates transparently; rules and procedures are clear and comprehensive and are fully disclosed to participants; participation and certain operational aspects are publicly available. - BM participant supervision unit monitors ongoing compliance and provides training where participants lack understanding. - BMSC intends to complete the disclosure framework as required to comply with international standards. Assessment of Principle 23: Observed Recommendation (from source): - BMSC should in the short term comply with the disclosure framework specified in the PFMIs. ### BMDepo — Legal basis (Principle 1, beginning) - BMDepo functions as the central securities depository for all securities traded on the BMS: corporate equity, REITS, ETFs and warrants. - BMDepo is part of the BM group and has no links with any other CSD but is linked to the CCPs - BMSC and BMDC. - BMDepo does not handle any functionality related to SSS. - BMDepo is an approved CSD under the SICDA sec 5.1. Legal framework excerpts: - Immobilization: Section 14 of the SICDA requires all securities to be deposited in an approved CSD by 1 December 1998. Currently over 99% of all securities are immobilized in the BMDepo. - Section 24 of the SICDA prohibits withdrawal of securities except in circumstances specified in the rules of the depository; BMDepo rules allow withdrawal in cases of de-listing, mergers and/or maturity of the instrument. - Section 20 of the SICDA requires lodging of “Jumbo” certificates with the BMDepo and all transfers thereafter to be carried in electronic book entry form at the BMDepo. - Division 6A, Part IV of the Companies Act 1965 sets out provisions applicable to companies whose securities are deposited with the central depository including Section107B and other provisions as described in the source. *Content unit: _cr1358 - Chapter 14 of BMDepo rules. These rules are available on Bursa Malaysia’s* ### Section 107C which states that the transfer of any deposited securities shall be ### Section 107C which states that the transfer of any deposited securities shall be ### Finality - The finality related provisions stem from the rules of the clearing house [BMSC Rule 802.2] and the CMSA, and is described in the KC 1.1 for the BMSC. ### Ownership of securities - Sec 21 of the SICDA specifies that the CSDs like BMDepo would be a bare trustee with no rights on the securities. - Sec 35 gives primacy to the ownership records in the books of the CSD and the owner as in the books of the CSD would have all the rights and liabilities as if he appeared in the relevant records of the issuer of the securities. ### Applicability of the rules of BMDepo (contractual enforceability) - In a court of law in Malaysia, a transaction made is binding based on the contractual relationship between the operator of a payment system and its participants, through the provisions in the Contracts Act 1950. ### Legal protection for electronic payment transactions - The DSA provides the legal framework for the use of electronic signatures. - In the court of law in Malaysia, an electronic payment transaction made is binding based on the contractual relationship between the operator of a payment system and its participants. - The EA recognizes any document produced by a computer as evidence in the court of law. ### Regulation and oversight of BMDepo - BMDepo is subject to regulatory oversight by the Securities Commission (“SC”). - The SC’s role to supervise and monitor the activities of any clearing house is stipulated in section 15(1)(f) of the Securities Commission Act 1993 (SCA). ### Other aspects (rules, approvals, legal opinions) - The rules for the operational aspects are described in the BMDepo rules. - The SICDA provides for a CSD to develop rules and these rules are also subject to the review and approval of the SC [Sec 9, CMSA]. - Relevant jurisdictions: The participants of BMDepo, including foreign institutions, are subject to Malaysian laws. BMDepo is incorporated in Malaysia as a 100% owned subsidiary of BM. The relevant jurisdiction is only Malaysia. - The BMDepo rules have been approved by the SC including any ongoing amendments except for ones deemed to have no material impact. - The BM has a process of seeking external legal opinion in the course of making any amendments (example: introducing securities borrowing and lending for the BMSC; and for all rules in relation to the introduction of the Competition Act 2010 in Malaysia). - These assessments and also based on the assessments of the SC, the BMDepo rules are deemed enforceable. ### Key consideration 1.2 — Clarity, understandability, consistency with laws - The BMDepo rules have been approved by the SC including any ongoing amendments except for ones deemed to have no material impact. - The BM seeks external legal opinion when making amendments (examples cited above). - Based on these assessments and the assessments of the SC, the BMDepo rules are deemed clear, understandable, enforceable and consistent with the Malaysian legal framework. ### Key consideration 1.3 — Articulation of legal basis - These Rules are publicly available at the Bursa Malaysia website www.bursamalaysia.com. - All participants of BMDepo are notified of any amendments to the rules via circulars. - Operational procedures are accessible to participants via eRAPID, a web-based solution to facilitate electronic transmission of circulars; these operational procedures are not publicly available. - The assessment against the RSSS conducted in 2007 (which covered BMDepo) was published and has a good articulation of the legal basis. - The SC requires a public consultation as a necessary step before it reviews and accepts any rule changes. - BMDepo has included a detailed FAQ section on the BM website to explain operations and procedures. ### Key consideration 1.4 — Enforceability in relevant jurisdictions - BMDepo rules have been approved by the SC including ongoing amendments except those deemed to have no material impact. - BM seeks external legal opinions for amendments (examples cited above). - These assessments and the SC’s assessments indicate the BMDepo rules are clear, understandable, enforceable and consistent with the Malaysian legal framework. ### Key consideration 1.5 — Conflict of laws for multi-jurisdiction operations - BMDepo’s operations could be subject to conflict of law in two scenarios: - (i) immobilization of foreign securities traded on the BMS; and, - (ii) foreign participant of the BMDepo. - BMDepo obtains independent legal opinion on potential legal issues with respect to immobilizing securities of a foreign issuer, and BMDepo requires issuers to comply with the SICDA. - BMDepo’s rules, which have the backing of Section 9 of the SICDA, are considered to be applicable even in the case of foreign participants as regards their activities within Malaysia. ### Key conclusions (legal and regulatory basis) - The legal and regulatory basis properly supports each of the material aspects of the BMDepo’s activities. - The only jurisdiction of relevance is Malaysia. - The rules, procedures and contracts derived from that legal and regulatory base are clear and understandable and are comprehensively articulated. - BMDepo rules, procedures and contracts have not been subject to judicial controversy, and actions taken under such rules, procedures and contracts have not been voided or reversed by another administrative or judicial authority. - The assessments done by the BM and the SC indicate the enforceability of all the provisions outlined in the BMDepo rules. - Assessment of Principle 1: Observed ### Governance (Principle 2) — summary of key points - BMDepo is a 100% subsidiary of the BM; BM is a de-mutualized stock exchange holding company and a public limited company, and BMDepo has adopted the BM group governance model. - Responses for the KC 2.x of the BMSC are stated as valid for BMDepo for KC 2.1 through KC 2.7. - Key governance features noted: - The BM follows a group governance model and BMDepo is subject to the BM governance arrangements. - The arrangements provide an effective framework for promoting efficiency and public interest. - Various board committees assist the board in executing its governance mandate. - The composition of the board and committees promotes efficiency and public interest objectives. - Processes exist to ensure effectiveness of senior management. - An ERM framework is used. - The risk management function for securities clearing and settlement is adequately staffed and is overseen by the Risk Management Committee of the board. - Rules and procedures are developed through a consultative process and participants have opportunities to express their views. - Key conclusion for Principle 2: Observed ### Framework for the comprehensive management of risks (Principle 3) — opening - Principle 3: An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks. - KC 3.1: BMDepo is a 100% subsidiary of the BM and has adopted the BM group governance model including for risk management. The responses for the KC 3.1 of the BMSC are referenced as applicable to BMDepo. *Source: _cr1358 - Section 107C which states that the transfer of any deposited securities shall be* ### 3.1 of the BMSC are valid for BMDepo as well. ### _cr1358 - 3.1 of the BMSC are valid for BMDepo as well. ### Risk management and enterprise risk framework (KC 3.1–3.4) - The BMDepo does not function as a SSS; its risks are primarily related to business risk and operational risk and these are managed as per the ERM framework of the BM group. - The responses for KC 3.2 of the BMSC are valid for BMDepo as well: an FMI should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMI. - The responses for KC 3.3 of the BMSC are valid for BMDepo as well: an FMI should regularly review material interdependency risks with other entities (other FMIs, settlement banks, liquidity providers, service providers) and develop appropriate risk-management tools. - The responses for KC 3.4 of the BMSC are valid for BMDepo as well: an FMI should identify scenarios that could prevent it from providing critical operations and services as a going concern, assess recovery and orderly wind-down options, prepare recovery/ wind-down plans, and provide relevant authorities with information needed for resolution planning where applicable. - Key conclusion(s): The BMDepo relies on the overall BM group ERM framework. A robust risk management framework is in place. The BMDepo does not function as a SSS hence its risks are primarily related to business risk and operational risk and these are managed as per the ERM framework of the BM group. - Assessment of Principle: Observed ### Central Securities Depository requirements (Principle 11; KC 11.1–11.6) - Function and accounts - BMDepo maintains accounts at the level of beneficial owners; accounts are tied to a participant of the BMS and transfer instructions can originate from participating organizations or directly from the customer. - Sec 35 of the SICDA provides all the rights of securities ownership to the beneficial owner as recorded in the books of a CSD. - Creation and deletion of securities - Securities are created in BMDepo as a result of new public offerings, corporate actions or dematerialization of unlisted securities, based on express instructions of the issuer or its registrar. - BMDepo rules govern required information, exchange mechanisms, and timelines; securities can be deleted only upon specific instructions by the concerned issuers or their registrars. - The eRapid system is used for exchange of information between issuers/registrars and the BMDepo. - Account holder and issuer protections - Sec 43 of the SICDA requires BMDepo to protect confidentiality of account owners. - Sec 23 of the SICDA and Ch 32 of the BMDepo rules require periodic account statements. - BMDepo rules require customer permission for any securities transfers. - Operational controls and governance require maintenance of strict audit trails and periodic audit of all critical procedures. - Sec 28 of the SICDA requires an approved CSD to conduct a quarterly stock-take and reconcile jumbo certificates with CSD books; SICDA requires timely processing of issuer requests for list of securities holders and corporate actions. - Internal Audit of the BM performs an annual audit of BMDepo operations; the SC also conducts periodic audits. - Operational controls to prevent overdrafts - Maker-checker procedures exist for all activities that can result in creation, deletion, or transfer of securities. - A daily automated stock-take of all securities transactions is performed and detailed audit trails are maintained. - The BMDepo system prevents any overdraft and debit balance in securities accounts. - Immobilisation/dematerialisation - The SICDA mandates immobilization of all securities traded on the BMS. - As of December 2011, 99.74% of securities in existence are immobilized in the BMDepo. The remaining paper-form securities were created before 1998. - Custody risk protections and financial safeguards - Rule 34 of the BMDepo rules provides for establishment of a compensation fund to recompense losses to clients due to negligence of BMDepo, internal fraud or computer crimes. - The size of the compensation fund currently is MYR50 million. - There is an insurance policy with a limit of indemnity of MYR 25 million. - The maximum amount of compensation payable to a claimant is MYR 100,000 per claim. - Segregation of assets - BMDepo maintains accounts at the level of beneficial owners. - BMDepo is prohibited as per Sec 36 of the SICDA from holding any securities which it immobilizes. - Additional activities and associated risks - BMDepo’s primary functions are recording securities issuance, transfer, and deletion. - BMDepo has recently started providing distribution of dividends and other corporate actions like processing of bonus issues; associated risks are primarily operational in nature and appropriate operational controls have been instituted. - Key conclusion(s): The BMDepo’s operations have a strong legal basis. Operational procedures are designed to protect issuers’ and holders’ interests. BMDepo provides accounts at the level of beneficiary owner. A compensation fund has been created to recompense losses to clients due to negligence, internal fraud or computer crimes. - Assessment of Principle 11: Observed - Recommendations and comments: - The BMDepo could institute periodic testing of its continued ability to support portability of client holdings. ### Participant-default rules and procedures (Principle 13; KC 13.1–13.4) - Role and scope - BMDepo functions as a CSD with no SSS activities. All BMDepo participants are required to be participants of the BMSC. - The default of a participant is handled as per the default procedures of the BMSC. - Specific BMDepo actions in a default - BMDepo can be required to execute transfer of securities to meet the settlement obligations of BMSC participants and to suspend the participant. - Beyond these actions BMDepo does not have any direct role in the default of a participant. - Preparedness and testing - BMDepo is operationally well-prepared to execute specific transfers and suspend defaulting participants’ accounts. - For other aspects (public disclosure of key aspects of default rules and participant involvement in testing/review), refer to the discussion for the BMSC (KC 13.3 and KC 13.4). - Key conclusion(s): The BMDepo functions as a CSD with no SSS functions. The default of participants is handled as per the default procedures of the BMSC. - Assessment of Principle 13: Observed ### General business risk (Principle 15; KC 15.1) - Identification and management - General business risks are identified as part of the ERM framework described for the BMSC (PFMI 2). - Under the group governance model the BMSC, BMDepo and the BMDC follow the same ERM framework for addressing business risk. - Assessment of Principle 15: (discussion continued in source) *Source: _cr1358 - 3.1 of the BMSC are valid for BMDepo as well.* ### 15.1 for the BMSC is applicable for the BMDepo as well. ### _cr1358 - 15.1 for the BMSC is applicable for the BMDepo as well. ### Principle 15 — General business risk (BMDepo) - Key considerations: - KC 15.2: An FMI should hold liquid net assets funded by equity to continue operations as a going concern; amount determined by general business risk profile and length of time required to achieve recovery or orderly wind-down. - KC 15.3: At a minimum, an FMI should hold liquid net assets funded by equity equal to at least six months of current operating expenses; these are in addition to resources for participant defaults; equity under international risk-based capital standards can be included where relevant. - KC 15.4: Assets for general business risk should be high quality and sufficiently liquid to meet current and projected operating expenses under a range of scenarios. - KC 15.5: An FMI should maintain a viable plan for raising additional equity if equity falls close to or below needed amounts; plan should be board-approved and updated regularly. - Descriptions / Findings: - As of December 2011, the BMDepo has enough liquid net assets funded by equity to support one year’s operational expenses. - The discussion under KC 15.2–15.5 for the BMSC is applicable to the BMDepo as well. - Key conclusion(s) and recommendations: - The BM uses an ERM framework and BMDepo leverages BM group risk management governance; BM group can be reasonably assumed to ensure continued operation of BMDepo or provide an alternative. - There is no explicit plan developed to handle group support/alternative operation event; "The BM group should consider developing such a plan." - Assessment: Observed ### Principle 16 — Custody and investment risks (BMDepo) - Key considerations: - KC 16.1: Assets should be held at supervised and regulated entities with robust safeguards. - KC 16.2: FMI should have prompt access to its assets. - KC 16.3–16.4: Evaluate custodian exposures and ensure investment strategy consistent with risk-management, disclose to participants; investments should be claims on high-quality obligors and liquid. - Descriptions / Findings: - BMDepo holds all its cash assets as deposits in banks and debt securities. - BMDepo does not hold any assets of clients or participants; SICDA prohibits BMDepo from holding securities immobilized in BMDepo. - BMDepo’s assets are in commercial banks in Malaysia or debt securities and it has prompt access to them. - BMDepo does not hold funds or securities of participants. - Key conclusion(s): - BMDepo maintains assets in FDs and other accounts in commercial banks in Malaysia and does not hold participant assets. - Assessment: Observed ### Principle 17 — Operational risk (BMDepo) - Key considerations and objectives: - KC 17.1–17.7: Robust operational risk framework; board roles; operational reliability objectives; scalable capacity; physical and information security; business continuity planning (BCP) with recovery objectives; manage risks from participants, FMIs, service providers. - Descriptions / Findings: - Operational risk managed by Corporate Risk Management Group for whole Bursa group using ERM. - Identified risks include: (i) business interruption; (ii) physical security including safe-keeping of Jumbo certificates; (iii) information security; (iv) fraud; (v) operational errors in securities transfers and ancillary services; (vi) service provider related risks. - Controls: back-up arrangements, data replication and backups, operational controls, business continuity procedures and periodic testing. - BCP simulation for BMDepo (part of BM BCP) carried out in November 2011. - Employee engagement measured at 72% in 2011. - IT management uses ITIL and PMI methodologies. - Operational reliability objectives: confidentiality and integrity of securities accounts; efficient, reliable, stable depository services; adequate risk management measures. - System capacity: BMSC and BMDepo run on same system; October 2011 average capacity utilization was 50%. - 2011 system down-times: five instances — three web-server overloads (operations restored in 30 minutes); two configuration problems (affected two stocks, normal operations resumed within the day). - BMDepo identified constraints in concurrent users and planned upgrades in 2012. - Bursa group’s backup site is in Damansara heights, Kuala Lumpur, around 10 Kilometres from the main site; online data replication exists. - BCP tested at least once a year with participation of BMSC, BMDepo and participants required to connect to DR site. - Business Recovery Time Objective (RTO) for critical systems including BMDepo: set at 5.5 hours at time of FSAP; reduced to four hours in July 2012. Decision to invoke DR process envisaged to take up to 3 hours (not included in RTO), so total could exceed 7 hours. - BMDepo process recoveries during BCP testing: just above two hours on two occasions; over three and a half hours in one instance. - Business hours: 8.30 Am to 7.00 PM Monday through Friday. End-of-Day processes scheduled from 9.30-1.30 PM. An impact can be recovered by beginning of subsequent day with current RTO. - Securities delivery timings: ISS settlement mode required by 10 AM on T+3 into BMDepo accounts; non-ISS required by 4 PM on T+2. Funds settlement leg linked to securities leg; operational impact during these times could affect BMSC’s ability to complete settlement on T+3. - Operational risks of BMDepo affect BMSC and BMDC; BMDepo holds securities accounts and records collaterals. - Key conclusion(s) and recommendations: - BMDepo leverages Bursa Group’s ERM and backup site 10 kilometres away; BCP tested annually; target RTO was 5.5 hours (reduced to 4 hours in July 2012) plus decision time up to 3 hours could lead to recovery time over 7 hours. - Risk management activities monitored by the RMC of the Bursa board. - Recommendation: "The BMDepo operational reliability measures need to be enhanced to achieve RTO of 2 hours." - Assessment: Broadly Observed ### Principle 18 — Access and participation requirements (BMDepo) - Key considerations: - KC 18.1–18.3: Fair and open access; risk-based participation requirements; monitoring compliance and procedures for suspension/exit. - Descriptions / Findings: - Two participant types: Authorized Depository Agents (ADA) and Authorized Depository Member (ADM). ADAs are TCPs of BMSC and ADMs are NTCP (custodians) of BMSC. - Criteria for ADA and ADM are stipulated under Rule 2.02 and 14.02 of Rules of BMDepo respectively. - Participants of BMDepo required to be participants of BMSC and BMS; BMSC access criteria apply to BMDepo. - Access policy and ongoing supervision managed at Bursa group level; specific institutional requirements addressed in respective rules. - Key conclusion(s): - Access policies and requirements are clear, transparent, and risk-based. - Assessment: Observed ### Principle 19 — Tiered participation requirements - Assessment: Not Applicable - Note: "BMDepo does not support tiered participation arrangements." ### Principle 20 — FMI Links - Key considerations: - KC 20.1–20.9: Identify and manage link-related risks; legal basis; measure credit/liquidity risk between linked CSDs; provisional transfers; investor/issuer CSD protections; intermediary use; CCP link spillovers. - Descriptions / Findings: - BMDepo has links with BMSC and BMDC for settlement of securities and depositing equity collaterals collected from participants. - Link is effectively unidirectional from BMSC and BMDC to BMDepo; BMDepo carries out instructions and is not dependent on them; operational risks included in group-wide operational reliability planning. - Many KC 20.x items marked Not applicable. - Key conclusion(s): - Link is unidirectional; principle effectively not applicable for BMDepo. - Assessment: Not Applicable ### Principle 21 — Efficiency and Effectiveness (BMDepo) - Key considerations: - KC 21.1–21.3: Design to meet participant/market needs; measurable goals and objectives; mechanisms for regular review. - Descriptions / Findings: - BMDepo designed as a CSD; operational procedures, membership arrangements and technology geared to efficient operations; enhanced issuer services for dividends and corporate actions. - Goals include confidentiality of accountholder information; preventing unauthorized usage; efficient service timelines as per CDS Procedure Manual and User Guide; continuous monitoring of submissions; adequate risk management; safe custody; facilitate deposit and registration; guard against falsification. - KPIs established at organization and personnel levels. - Participant feedback obtained via annual survey and periodic consultations. - Post-implementation review for new initiatives performed; BMSC operational indicators apply: time to complete trade processing; adherence to cut-off times; system availability. - Key conclusion(s): - BMDepo has processes ensuring efficiency and participant satisfaction; participants interviewed expressed satisfaction. - Assessment: Observed ### Principle 22 — Communication procedures and standards - Key consideration: - KC 22.1: Use or accommodate internationally accepted communication procedures and standards. - Descriptions / Findings: - BMDepo uses a proprietary message format; system interfaces use industry standard protocols like TCP/IP. - Key conclusion(s): - BMDepo uses proprietary message formats for securities transfer instructions with BMSC and collateral registrations; other participant interactions use system screens and industry standard protocols. - Assessment: Observed ### Principle 23 — Disclosure of rules, key procedures and market data - Key considerations: - KC 23.1–23.5: Clear/comprehensive rules; disclose system design/operations and rights/fees; provide documentation and training; publicly disclose fees; disclose CPSS-IOSCO Disclosure Framework responses and basic transaction data. - Descriptions / Findings: - Operational procedures and circulars available to clearing participants via eRapid; BMDepo, BMSC and BMS rules posted on Bursa website. - Technical Architecture Design and Operational Run Chart provided to participants and vendors upon NDA; technical documents sent by circulars. - Fees and charges provided to new participants; changes notified via circulars; fees available in BMDepo rules. Bursa annual report discloses governance model and BMDepo risks/mitigations; BM published self-assessment against RSSS in 2007. - New participants receive training; ongoing supervision identifies knowledge gaps and triggers training. - Fees communicated via rules or circulars; Bursa does not offer further discounts; any future discounts expected to be consistently applied. - Disclosure Framework (CPSS-IOSCO) release timing: current version released mid-April 2012 and still in consultation phase at time of report; KC 23.5 deemed not applicable at that time. SC requires BMDepo to comply and BMDepo preparing to comply. - Key conclusion(s) and recommendation: - BMDepo operates transparently with clear rules/procedures disclosed to participants and certain operational aspects public. - Recommendation: "In the short term the BMDepo should fully comply with the disclosure framework requirements of the PFMI." - Assessment: Observed ### Selected BMDC findings (Principles 1–13) — summary of material points - Principle 1 (Legal basis) - Legal/regulatory framework: CMSA 2007, Rules of BMDC, Rules of BMD, Evidence Act 1950, Companies Act 1965, Digital Signature Act 1997, Contract Act 1950, Securities Commission Act 1993. - Finality and insolvency protection: Rule 602(d) and CMSA Sec 43 provide finality and protect default procedures from insolvency proceedings. - Netting and novation: Rules (e.g., Rule 614(b), Rule 602) provide set-off and novation; CMSA and SC view that legal framework protects netting and novation though not explicitly in law. - BMDC rules approved by SC; rules publicly available at www.bursamalaysia.com. - Key conclusion: Legal/regulatory basis properly supports BMDC activities in Malaysia. - Assessment: Observed - Recommendation: Strengthen legal certainty by addressing netting/novation explicitly in law in medium term; proposed Financial Services Act provides opportunity. - Principle 2 (Governance) - BMDC is a fully owned subsidiary of BMD (BMD is joint venture: BM 75%, CME 25%); BM follows group governance model; BMDC governed via group boards/committees. - Objectives prioritize orderly, clear and efficient clearing/settlement and public interest per CMSA. - KPIs and performance reviews established; Derivatives Operations Risk Management function has three staff. - Key conclusion: Governance arrangements effective and promote public interest. - Assessment: Observed - Principle 3 (Comprehensive risk management) - BMDC relies on BM group ERM; risk management robust; monitoring of participant financial resources, MTM margins, daily stress testing of Clearing Fund. - Key conclusion: Robust framework in place; large-scale default could impair BMDC but mitigated via monitoring and stress tests. - Assessment: Observed - Principle 4 (Credit risk) - BMDC credit risk framework: margin collateral (Rule 613), intraday margin (Rule 615), security deposit (Rule 206A), clearing fund (rule 401), participant financial requirements (rule 208), default rules (Ch 10). - As at 31 December 2011 financial resources: Clearing Fund MYR 26 million; Security Deposit MYR 21 million; Direct Clearing Participant Deposit MYR 3.96 million; Margin requirements MYR 800 million. - Daily and intraday stress tests conducted; BMDC resources sufficient to meet default of CPs with the two largest positions in tested scenarios. - Stress-testing details: - Daily stress test parameters include latest open positions, latest financial resources, latest price movement, pre-defined stress scenarios, Clearing House financial resources. - Daily stress test run at hourly intervals starting at 8.30 AM; uses two historical worst-case scenarios across five actively traded derivative products: FKLI, FKB3, FCPO Spot, FCPO non-spot and FMG5. - Stress-test incidents: 0 in 2009; 2 in 2010; 2 in 2011; 1 in 2012 — deemed isolated and handled with additional margin requirements. - Key conclusion: Credit risk framework uses margins, clearing fund, deposits, monitoring and daily stress tests. - Assessment: Broadly Observed - Recommendation: Expand stress testing to include other market factors, multi-product adverse movements and forward-looking scenarios. - Principle 5 (Collateral) - Accepted collateral: Cash (MYR, USD, GBP, EUR, SGD, AUD, HKD, RMB & JPY); SBLC; selected Malaysian equities (top 30 by market-cap). - As at assessment: foreign currency constitutes about 1% of collateral funds. - Haircuts: equities 30%; foreign currency haircuts monitored daily and quarterly back-tested including 2008-09 stressed period. - Concentration limits: system enforces limits per collateral type and bank-wise limits for SBLC; no limits for cash collateral. - Key conclusion: Collateral management policy ensures low credit/liquidity/market risk; consider concentration limits for foreign currency and acceptance of MGS. - Assessment: Observed - Principle 6 (Margin) - Margin model: SPAN, risk-based, modeled to cover 1-day potential exposure; objective covers "normal" market volatility; margin measured at 99.5% VaR; volatility weights over 5-days, 30-days, 90-days, 240-days combined weighted VaR. - Intraday margin: triggers when margin erosion > 60%; CP required to honor margin call within 1 hour; failure treated as default. - Margin model review/back-testing: daily back-testing; model review twice yearly historically; post-FSAP instituted monthly review and sensitivity analysis; most recent review June 2012 changed volatility weight for FKLI and FCPO. - Key conclusion: Margin system is risk-based, uses SPAN and 99.5% VaR; model review frequency increased post-FSAP. - Assessment: Broadly Observed - Principle 7 (Liquidity risk) - Relevant currency: Malaysian Ringgit (MYR). - BMDC financial resources (typical day): - Cash and bank balances: MYR 25.1 million. - Margin - cash MYR 623.8 million; Letter of credit (LC) MYR 387.5 million. - Security deposits - cash MYR 5 million; LC MYR 15 million. - Direct clearing participant deposit – cash MYR 3.96 million; LC MYR 5 million. - Clearing Fund MYR 27.4 million (Participants' contribution MYR 22.4 million; BMDC's contribution MYR 5.0 million). - Intraday Overdraft Facilities committed: MYR 90.0 million from settlement banks and MYR 200 million shared with the Group. Individual banks: Maybank MYR 30 million; RHB Bank MYR 30 million; Deutsche Bank MYR 30 million; Standard Chartered Bank MYR 200 million (shared with Bursa Group). - Stress-test result March 2012: highest potential uncovered loss in extreme scenario MYR39 million. - Settlement banks criteria: licensed commercial banks approved by BNM; real time online banking; intraday credit; payment cut-off compliance; minimum credit standing (RAM at least A; S&P at least BBB/C). - BMDC uses private settlement bank model with four settlement banks; settlement flows concentrated in two banks accounting for over 70% of flows. - BMDC did not have access to central bank liquidity support per BNM policy. - Post-FSAP enhancements (from November 2012): enhanced liquidity needs assessment and instituted daily liquidity stress test including scenarios for unavailability of large credit line and withdrawal of 80% excess margin. - Key conclusion: Daily liquidity forecasting/needs assessment used; resources and intraday facilities adequate for tested scenarios but BMDC should continue to enhance liquidity stress testing and establish structured review process. - Assessment: Broadly Observed - Recommendation: Consider migration from commercial bank money to central bank money (RENTAS) in time-bound manner with SC and BNM involvement. - Principle 8 (Settlement finality) - BMDC rules (Rule 504) and CMSA provide finality; daily settlements completed at 10 AM and deemed final once funds are credited; intra-day margin calls processed with immediate finality. - Assessment: Observed - Principle 9 (Money settlements) - BMDC settles in commercial bank money via settlement banks; tri-partite agreements enable BMDC to instruct debits and provide irrevocability. - Recommendation: Migrate to central bank money (RENTAS) over time. - Assessment: Observed - Principle 10 & 12 (Physical deliveries & Exchange-of-value) - Physical delivery supported for Palm Oil and Palm Oil Kernel; detailed processes in Chapter 8 and CP Manual; deliveries to approved PTIs at Port Klang, Butterworth and Pasir Gudang between 1st and 20th of delivery month; PTI issues e-NSR; BMDC allocates deliveries pro-rata; margins enhanced near delivery month. - Principal risk eliminated via delivery procedures. - Assessment: Observed - Principle 13 (Participant-default rules and procedures) - Chapter 10 of BMDC rules specifies default grounds and actions; Rules 1001 and 1002 permit novation or liquidation of open positions and liquidation of collateral to set off defaulted amounts. - Assessment: (implied Observed in material) *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1358.pdf* ### Section 43 of the CMSA ### _cr1358 - Section 43 of the CMSA ### Default legal framework and powers - Section 43 of the CMSA provides for the default proceeding by the clearing house to take precedence over the Law of Insolvency. - Further section 43 of CMSA and Chapter 10 of BMDC Rules empower the BMDC to draw promptly on the financial resources available in its default management actions. - Rule 407 of the Rules of BMDC provides for the replenishment of Clearing Fund in the event that the clearing fund is drawn upon: BMDC will issue a statement to inform CPs of their share of loss and CPs are required to replenish the clearing fund within one business day upon being notified. ### Triggers for invoking default procedures (Chapter 10 of BMDC rules) - failure to meet in full a call for Margin; - failure to pay a Premium under Rule 700 of the Rules of BMDC or any settlement difference pursuant to Rule 608 or 612 of the Rules of BMDC; - failure to promptly meet its obligations under the terms of an Open Contract; - failure to meet in full its Clearing Fund Contribution; - When applicable, failure to meet in full its Direct Clearing Participant Deposit; - ceases to be an Affiliate of an Exchange due to termination of its membership by such Exchange or its membership of an Exchange is suspended; - is unable to pay its debts as and when they fall due in the ordinary course of business; and, - files a petition for the winding up of its affairs, or, has been ordered to wind up its affairs (voluntary or involuntary winding up) ### Default Management Committee (DMC) and operational procedures - BMDC has developed a Default Management Procedure and constituted a Default Management Committee comprising the CEO of the BMD and the heads of business development, operations and risk management. - Default procedures and workflow: - Default Management Committee (DMC) is alerted when there is default event. - The DMC will meet to deliberate the case and decide on the actions to be taken. - BMDC will take the necessary actions to transfer positions, liquidate collateral, utilisation of clearing fund and etc as per DMC’s instructions. - DMC’s decision will be guided by the provisions in BMDC Rules, in particular Chapter 10. - BMDC will engage the defaulting CPs back office onsite to facilitate the default actions. - Communications will be handled by BM Corporate Communications team. - Post-default, BMDC will submit report to the relevant authority, including the Board of Directors and Securities Commission. - DMC specific responsibilities: - To declare a default. - To deliberate the appropriate actions to be taken by the BMDC. - To manage communication with other stakeholders, which include BM, CME Group and SC. - To work with Bursa Communication team on communications with media & public. - BMDC responsibilities: - To take action based on the decision by DMC. - To update DMC on the default actions taken. - To manage communications with Clearing Participants. - Exchange (BMD) responsibilities: - To facilitate default actions by Clearing House, where necessary. - To manage communications with Trading Participants. ### Testing, review and drills (Key considerations 13.2–13.4) - The default handling procedures are reviewed as and when there are significant local or international developments. - In the aftermath of the recent failure of a large commodity clearing house participants in the US (MF Global) the BMDC reviewed its default handling procedures. - A default drill was planned in January 2012 for December 2012 and was carried out as planned on 13-December-2012. - The Default Event Drill 2012 verified readiness, in particular tested the ability to port clients’ positions. - Portability was tested by isolating defaulting clients’ accounts and transferring non-defaulting accounts to other Clearing Participants. - The drill involved BMDC as the Clearing House, and all but one of the BMDC participants. - The assessor was notified that the drill achieved its stated objective and that BMDC instituted the default drill on an annual basis thereafter. - Key consideration 13.2: An FMI should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. - Key consideration 13.3: An FMI should publicly disclose key aspects of its default rules and procedures. - Description: The relevant rules and procedures are posted on the website of the Bursa Malaysia and are also available to the CPs through the eRapid system for distribution of any changes by way of circulars. - Key consideration 13.4: An FMI should involve its participants and other stakeholders in the testing and review of the FMI’s default procedures, including any close-out procedures; such testing and review should be conducted at least annually or following material changes. - At the time of the FSAP assessment, BMDC did not involve the participants in its review of the default procedures, but then carried out the Default Event Drill on 13-December-2012 and instituted annual drills thereafter. ### Assessment, conclusions and recommendation (Principle 13) - Key conclusion(s): - The BMDC has established a default management procedure which identifies the roles and responsibilities of the various stakeholders. - The rules related to the default management are clearly specified in the BMDC rules and these have the backing of the CMSA. - The rules provide ample powers and flexibility to the BMDC in handling any defaults. - The default management procedures are reviewed based on any significant domestic or international events. - Assessment of Principle 13: Observed - Recommendations and comments: - At the time of the FSAP assessment the BMDC was in the process of conducting a default drill involving the participants. The BMDC has since then successfully completed the default drill and has also instituted this as an annual exercise. - The BMDC should ensure that this drill is carried out periodically on an ongoing basis and any gaps or issues identified are addressed in a time-bound manner. ### Segregation and portability (Principle 14 and Key considerations 14.1–14.4) - Principle 14: A CCP should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions. - Key consideration 14.1 (minimum segregation and portability arrangements): - Section 118 of the CMSA requires that all clients’ assets must be segregated from the CP’s own assets and requires the CP to have prior customer instructions to use the clients’ accounts. - In the case of pass through letter of credit, BMDC manages the collateral of the clearing participants’ clients directly. - Other than pass-through letter of credit, clearing participants are responsible to manage funds, collaterals and margins of their customers as set out in Rule 614 of the Rules of BMDC. - BMDC calculates the margin for each client’s account separately and totals it up as a requirement for the clearing participants. - Key consideration 14.2 (account structure and identification): - BMDC requires reporting of client information for all trades and calculates margin requirements on a client level. - BMDC does not have direct access to the CP’s books; however, in the event of invoking default procedures, it has the powers to require the CP to help the BMDC in segregating the client funds, positions and collaterals. - BMDC rules require the CP to maintain client funds and collateral in a segregated manner, as required under the CMSA. - The BMDC computes collateral on a gross basis at the client level, hence it has the required information to assist it in segregating client level collaterals. - Key consideration 14.3 (portability arrangements and testing): - BMDC does not handle clients’ collateral and funds directly; it relies on the CPs internal records. - BMDC rules and the CMSA both require CPs to maintain client accounts in a segregated manner. - BMDC tested its ability to port positions of a defaulting CP to another CP as part of the implementation of the new clearing system in February 2012; however, there are no periodic testing undertaken for this aspect prior to the instituted annual drill. - CPs are audited by BM’s participants monitoring team periodically and this aspect is reviewed as part of that audit. - Key consideration 14.4 (disclosure of segregation and portability rules): - BMDC rules are available at the Bursa Malaysia’s website, and the requirement of the CPs is also mentioned in the financial safeguards and risk management. *Source: _cr1358 - Section 43 of the CMSA* ### section in the website. ### _cr1358 - section in the website. ### Key overall findings and conclusions - BMDC does not maintain client funds and collaterals (except in the case of pass-through letter of credit); BMDC rules and the CMSA require the CP to ensure that client funds are segregated. - At the time of the FSAP assessment BMDC did not periodically test its ability to port clients’ positions from a defaulting participant to another; portability testing was included in the first default management drill post-FSAP and is intended for all future default drills. - BMDC has adopted the BM group governance model for risk management and business risk is handled at BM group level. - On a stand-alone basis BMDC maintains over 6 month’s operational expenses. - BMDC maintains its own and participants’ cash assets in fixed deposits (FDs) and other accounts in commercial banks in Malaysia; participants’ securities collateral for margin purposes is held in BMDepo. - BMDC has a partner exchange arrangement with the GLOBEX trading platform of the CME, which affects BCP arrangements. - BMDC’s messaging interfaces use industry standard technology platforms though the message formats are proprietary; participants reported no issues. - BMDC operates transparently: rules, participant manuals, circulars, and internal technical documents are provided to CPs; many items are publicly available via Bursa Malaysia website in English. ### Principle 14 — Portability (summary) - Observed. - Findings: - BMDC did not periodically test portability before the FSAP assessment. - Portability testing was included in the first default management drill conducted post-FSAP. - Recommendation: - BMDC should ensure portability testing is included in all future default management drills and that any issues or gaps identified are addressed in a time-bound manner. ### Principle 15 — General business risk (summary) - Observed. - Key descriptions: - BMDC uses the BM group governance model for risk management; BMSC KC 15.1–15.5 responses apply to BMDC. - On a stand-alone basis BMDC maintains over 6 month’s operational expenses. - Relevant numeric requirements and standards referenced: - Minimum holding for general business risk: at a minimum, liquid net assets funded by equity equal to at least six months of current operating expenses (textual standard from the principle). - Recommendation/comments: - BMSC descriptions and recommendations for KC 15.x are applicable to BMDC. ### Principle 16 — Custody and investment risks (summary) - Observed. - Findings: - BMDC holds cash assets and CPs’ cash assets as deposits in banks; accounts opened in Hong Kong with HSBC for HKD deposits (mirrored with HSBC Malaysia) but not currently used. - BMDC chooses banking partners based on operational ease, services, capital adequacy and credit rating. - CPs’ equity collateral is maintained at BMDepo in a depository account in BMDC’s name. - BMDC rules [rule 413] permit clearing fund investments in government securities or deposits in prescribed financial institutions. - Rule 616(c) states interest and other benefits accruing from underlying assets provided for margin accrue to the CP; BMDC rules allow CPs to replace collateral placed for margin. - BMDC’s investment policy is very conservative; all assets are held in banks in Malaysia as FDs or in regular accounts. - Conclusion: - BMDC maintains assets and participants’ assets in FDs and other accounts in commercial banks in Malaysia; participant securities collateral for margin is held in BMDepo. ### Principle 17 — Operational risk (summary) - Assessment: Broadly Observed. - Key points: - BMDC has adopted BM group governance model; descriptions for KC 17.1–17.5 and 17.7 for BMSC apply to BMDC. - BMDC has a partner exchange arrangement with GLOBEX of the CME impacting BCP (KC 17.6). - Recent three rounds of BCP testing: BMDC achieved a business recovery RTO of under two hours. However, BMDC terminology implies a potential gap between event occurrence and recovery of business processes at backup site of potentially more than four hours. - BCP includes testing information exchange with GLOBEX at both primary and secondary CME sites. - Recommendation/comments: - Recommendations and comments for Principle 17 for the BMSC apply to BMDC. ### Principle 18 — Access and participation requirements (summary) - Observed. - Findings: - Eligibility and minimum financial requirements for General and Direct clearing participants (CPs) are prescribed under Rules 200A and 200B. - Trading participants (TPs) of BMD-derivatives exchange are required to be a CP of BMDC. - All TPs are required to have a minimum issued and paid-up capital of RM5 million. - Adjusted Net Capital (ANC) framework: minimum for General CPs is to maintain ANC at the higher of MYR 500,000 or 10% of the total amount paid by the CP to the Derivatives Clearing House [Rule 208A]. - Non-investment banks must comply with CAR imposed by the Exchange; investment banks must comply with Central Bank capital adequacy. - Direct CP requirements [Rule 208B]: - maintain Net Tangible Assets of not less than MYR 5 million, or a corporate guarantee of not less than MYR 5 million; or - lodge Direct CP Deposit of at least MYR 1 million in cash and/or Approved Collateral in accordance with Rules 206B. - Rule 205(g): each CP must maintain an adequate back office system, staff and procedures to ensure orderly accounting of derivatives dealings. - BMDC applies risk-based participant operational capability assessment via on-site inspection and off-site supervision. - On a monthly basis TPs must report Adjusted Net Capital and Balance Sheet and provide statement of compliance to client funds segregation; TPs audited at least once in 3 years (higher risk more often). - Participant supervision team: around 24 people organized into 3 teams. - Conclusion: - Access policies and requirements are clear, transparent, and risk-based; managed at Bursa group level with institution-specific rule details. ### Principle 19 — Tiered participation requirements - Not Applicable. - Comment: - BMDC does not support tiered participation arrangements. ### Principle 20 — FMI links - Observed. - Findings: - BMDC’s only link with other FMIs is with BMDepo for depositing equity collaterals collected from CPs. - BMDC and BMDepo were created under CMSA and SICDA respectively and are supervised by the SC; both are group institutions under group governance model. - KC 20.3, 20.7, 20.8: Not Applicable where indicated in source. - Conclusion: - The only FMI link is with BMDepo; BMDC and BMDepo are subject to group governance and legal frameworks. ### Principle 21 — Efficiency and effectiveness - Observed. - Findings: - BMD is a joint venture between BM and CME; operational arrangements and technology benefit from CME knowledge sharing. - BMDC conducts periodic benchmarking; margin benchmarking analysis is performed on a monthly basis. - BMDC goals aligned with BMSC: - To process, execute and complete all clearing and settlement activities in a timely manner, in accordance with prescribed procedures, rules, guidelines and directives. - To provide an efficient, reliable and stable clearing and settlement infrastructure. - To ensure adequate risk management measures, including monitoring participant’s settlement ability, effective default handling and adequacy of financial resources. - KPIs are established at organization and personnel levels. - BMDC obtains participant feedback via annual survey and periodic consultations. - Operational targets: (i) Time taken to complete trade processing; (ii) Adherence to cut-off times; (iii) System availability. - BMDC performs post-implementation reviews for new initiatives; SC requires such reviews for SC-approved projects. - Conclusion: - BMDC has processes to ensure efficiency; participants interviewed expressed satisfaction. ### Principle 22 — Communication procedures and standards - Observed. - Findings: - BMDC interfaces with GLOBEX for receiving contracts to be novated, with participants for sending settlement positions, and screen-based interfaces for margin calls. - Interfaces built on industry standard technology platforms; message formats are proprietary. - Participants, including foreign partners, expressed satisfaction with communication standards and message formats. ### Principle 23 — Disclosure of rules, key procedures and market data - Observed. - Findings: - Documentation disseminated to CPs: business rules, CPs’ manuals, circulars; risk management measures included in CP manual and BMDC Rules. - Legal framework and operational matters: legal framework information publicly available via Bursa Malaysia website in English; operational matters governed via circulars to market participants. - Rights and obligations of CPs set out in BMDC Rules (e.g., Ch 1 obligations; Ch 2 compliance; Ch 5 responsibilities). - Technical Architecture Design and Operational Run Chart describe systems design and are provided to CPs technical teams and vendors under NDA if required. - System provides to CPs: - Matched trades and open positions (real time) - Financial information: cash and collateral (end of day) - Risk: performance bond requirement for each clients’ account and risk arrays for margining (end of day and intraday) - Financial requirement: clearing fund contribution, security deposit and deposit (end of day) - Physical delivery: allocation of delivery receipts and payable amount (end of day) - Settlement parameter: daily settlement price and theoretical variable (end of day) - Training and remediation: participants demonstrating lack of understanding may be required to furnish regular reports; training provided as required; non-compliance escalated to Market Participants Committee with possible trading restrictions and fines. - Fees: BMDC provides fee details to participants; participants expressed no concerns regarding fee transparency. - CPSS-IOSCO Disclosure Framework: current version released mid-April 2012 and in consultation phase; KC 23.5 deemed not applicable at assessment time. SC requires BMDC to conduct self-assessments against CPSS and IOSCO principles and will require BMDC to complete the disclosure framework in due course. - Recommendations/comments: - BMDC intends to complete the disclosure framework as required to be in compliance with international standards; BMDC should clearly articulate design aspects, fees and charges. ### Responsibilities of authorities — Regulation, supervision, oversight (A–E) - Responsibility A (Regulation, supervision, oversight of FMIs) - Assessment: Observed. - Findings: - Legal framework: CBA and PSA empower BNM to regulate/oversee national payment and settlement systems; PSA permits designation of systems for enhanced oversight. - CMSA and SCA require SC to regulate, supervise and oversee clearing houses, CSDs, exchanges, TRs, participants and related FMIs. - FMIs identified in Malaysia: RENTAS, eSPICK, BMSC, BMDepo, BMDC. Bursa Bonds evolving toward TR oversight. - Responsibility B (Powers and resources) - Assessment: Observed. - Findings: - BNM powers include licensing PSOs, revocation, information requests, examination/search/seizure, requirement setting (governance, operational arrangements), issuing directives, inspection rights, issuing regulations and guidelines. - SC powers under SCA, SICDA, CMSA: licensing exchange holding companies, clearing houses and CSDs; require annual reports; seek information, inspect and audit; direct rule changes (via minister of finance); require approval of rule changes; issue regulations and guidelines. - Resource staffing: Payment Systems Policy Department (PSPD) of BNM: 5 staff headed by a Director. Institution Supervision under Market Oversight (SC): 20 staff headed by a General Manager. SC conducts annual on-site audit of Bursa group; since 2004 there have been six audits including 1 thematic audit. - Responsibility C (Disclosure of policies with respect to FMIs) - Assessment: Broadly Observed. - Findings: - BNM issued a supervisory expectations letter to MyClear (RENTAS and eSPICK) articulating oversight expectations and international standards compliance. - SC articulated policies through meetings and circulars; CMSA provides oversight policy foundation. - Public disclosure: BNM includes payment systems chapter in Financial Stability report; BNM site has payment systems detail but no dedicated payment systems oversight page. SC added a dedicated web-page post-FSAP articulating high-level oversight activities, but it lacks full scope and recent oversight results. - Recommendation: - SC and BNM could elaborate and publish oversight policies in more detail; BNM could consider a dedicated web-page; SC could enhance its new web-page and include oversight detail in other publications like the annual report. - Responsibility D (Application of the principles for FMIs) - Assessment: Observed. - Findings: - SC and BNM have adopted CPSS-IOSCO standards and mandated compliance; FMIs required to conduct periodic self-assessments. - Application: CPSIPS, RSSS, and RCCP applied to relevant FMIs; steps initiated to require FMIs to comply with PFMI and to require Bursa Bonds as TR to comply. - Responsibility E (Cooperation with other authorities) - Assessment: Broadly Observed. - Findings: - Legal/regulatory demarcation: SC oversees BMSC, BMDC, BMDepo; BNM oversees payment/settlement systems including RENTAS and eSPICK. - BNM and SC have an MOU for information exchange and cooperation; MOU was in process of upgrade at FSAP time and a new MOU was signed in October 2012 with dedicated provisions for cooperative oversight and a focus group for ongoing discussion. - The MOU framework did not originally spell out specific information types for certain cooperative activities (e.g., verification of settlement banks, joint BCP tests) but post-FSAP MOU and focus group addressed specific collaboration areas including: (i) designation of clearing houses as systemically important PSS; (ii) inclusion in BNM supervision activities of verification of banks’ ability to meet commitments to FMIs; (iii) including BMSC and BMDC as participants in RENTAS; (iv) leveraging SC oversight of Bond Pricing Agency (BPA). - BNM maintains dialogue with HKMA regarding USD CHATS links; cooperative oversight arrangements exist with CBRC for MYR-RMB transactions (BOCM involvement). - PIDM (deposit insurance agency) coordinates dissolution of insured entities with BNM; SC envisages MOU with PIDM for insolvency procedures of participants. - Recommendation/comments: - BNM and SC could leverage the new MOU framework to enhance operational coordination, including sharing information on oversight assessments and measures to enhance FMIs’ risk management. *Source: _cr1358 - section in the website.* ### 37. BNM and SC would like to thank the FSAP mission team for the substantive ### 37. BNM and SC would like to thank the FSAP mission team for the substantive discussions, comprehensive assessment and recommendations in relation to the recently issued Principles for Financial Market Infrastructures (FMI) assessment ### Assessment findings and implementation status - The high level of observance accorded to RENTAS, BMSC, BMDC and BMDepo in this assessment under the more stringent FMI principles demonstrates that the strategic “roadmap” and the oversight approach adopted by both BNM and SC in regulating these infrastructures have been effective. - Given the robust payment and settlement framework already in place, BNM and SC have been able to fully implement many of the recommendations made by assessors, while others are in the midst of being implemented. - In 2008, Malaysia voluntarily underwent an independent assessment to benchmark compliance with the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles), including assessment on compliance with CPSS-IOSCO Recommendations for Securities Settlement Systems (SSS). ### Methodology, timing and contextual challenges - The FMI assessment was undertaken while the FMI principles and methodology were still being finalized and internationally consulted; the capital market had initially used CPSS-IOSCO Recommendations for SSS and CCP and related methodology for self-assessment. - The FSAP mission persuaded authorities to use the new standards and methodology and provided a “patch” for a further round of self-assessment to bridge gaps between CPSS-IOSCO recommendations and the FMI principles. - Ratings were based entirely on strict application of the new FMI methodology; given the absence of a “track record” of assessments under the new FMI principles, Malaysia felt disadvantaged by the inability to exercise flexibility and apply the principles to circumstances peculiar to Malaysia. - An important issue: application of the methodology must be done within the context of the structure and characteristics of the domestic financial sector; assessment should give sufficient weight to outcomes achieved even if implementation does not match the methodology’s described approach exactly. ### Stress testing, proportionality, and outcomes-based recognition - Stress testing should be commensurate with the risks in the Malaysian capital markets and avoid detrimentally-high costs of capital and operations. - Regulatory equivalence should be recognised: features of the country financial sector and existing frameworks that build regulatory strength and reinforce each other should be taken into account. - Assessors should give due recognition to outcomes of measures and not just the specific measures in place; the methodology provides options to achieve intended results and assessors should focus greater attention on actual results of measures. ### Specific principles viewed as lacking contextual consideration - Bridging Finance Facility (BFF) not included by BMSC in its stress testing: - Assessors need to give weight to outcomes: the utilisation rate of the facility is described as “very insignificant” and the PO’s financial standing is “relatively strong”. - Bursa Malaysia has intention to remove the BFF. - Scenarios for robustness stress testing in relation to the capital markets: - Scenarios should take into account other market factors, adverse movement in more than one product and other forward looking stress scenarios. - The “5 additional scenarios for stress test undertaken soon after being informed by assessors” showed results that such additional factors did not post a significant loss to the Clearing Fund and the financial resources remain adequate. - The quick ability to implement shortcomings indicates robustness of the risk framework; due weight should be given to the underlying framework and results of tests. - Requirement for margins in the securities trading: - The principle on margin requirements for securities markets was first assessed as “not applicable” for the clearing of securities at the first round of assessment in July 2012. - Post peer review, it was reclassified as applicable and rated as “not observed”. - Authorities argue that Malaysia has a collateral system that is “proven to be as effective as the margin requirements” and that this alternative pooled collateral system “broadly achieves the intended results and objectives of a margin system”. - The alternative system of clearing and settlement is recognised in the FMI principle. ### Coordination between SC and BNM - The SC and BNM work closely together to ensure financial stability; this coordination has helped build market confidence and manage systemic risk issues. - For FMI, SC and BNM continuously engage, share information, co-operate closely and undertake pre-emptive interventions where necessary. - The regulatory framework is underpinned by coordination between SC and BNM at various levels on operations and policy; effectiveness has been tested and demonstrated in avoidance of defaults and early management of problem issues. ### Going forward — CMP frameworks and planned enhancements - CMP1 (2001-2010): - Recognised that an efficient trading, clearing and settlement infrastructure helps make more instruments accessible to larger pools of liquidity at minimal cost. - On-going benchmarking of trading, clearing and settlement standards and processes against international best practices remains a key priority. - CMP2 (2011-2020): - Recognised that trading infrastructure for equities, derivatives and bonds has been enhanced, but changing intermediation landscape requires further reduction in friction costs and a seamless post-trade infrastructure. - Areas identified include enhancing post-trade settlement efficiencies through implementation of straight through processing capabilities; identifying required improvements in clearing and settlement, depository, custody and collateral management practices; facilitating integration of clearing and settlement with the payments system. - Integration of the money market and exchange-traded settlement systems will offer major benefits and help reduce settlement risk by introducing finality and certainty to payments. - Other areas: reducing the gap on delivery-versus-payment arrangements and strengthening the process for failed trades. - Planned regulatory actions: - Revamping Guidance on the Regulatory Role of Bursa Malaysia in the current year. - In line with FMI standards, introducing specific requirements and obligations on the clearing, settlement and depository services provided by Bursa Malaysia, including: - Enhancements to credit and liquidity risk management. - Strengthening collateral management practices. - Improving information sharing, supervision and surveillance of clearing and settlement activities to better monitor, mitigate and manage systemic risk to the financial sector. *Source: _cr1358 - 37. BNM and SC would like to thank the FSAP mission team for the substantive* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1358.pdf_