Financial Market Infrastructures (FMIs) and Retail Payment Systems (RPSs) as per RBI

Ashish M. Shaji

22 Jul, 2020

Recently, the Reserve Bank of India came up with a modified framework for Financial Market Infrastructure and Retail Payment Systems to ensure the safety and stability of the payment structure.

What is Financial Market Infrastructure (FMI)?

An FMI is defined as a multilateral system among participating institutions, including the system operator used for clearing, settling, or recording payments, securities, derivatives, or other financial transactions. FMI usually refers to Systematically Important Payment Systems, Central Securities Depositories, Securities Settlement Systems, Central Counter Parties, and Trade Repositories that help in the clearing, settlement, and recording of the financial transactions.

What is Retail Payment Systems?

Retail Payment Systems refer to transactions effected through phones, internet, ATMs, PoS networks, and with contactless technology such as card payments and tokenization, electronic billing and use of various systems and platforms in order to make instant payments. 

What is the significance of Financial Market Infrastructures?

FMIs are the backbone of the financial system and contribute to financial stability and economic growth by ensuring reliable, safe, and efficient payment clearing and settlement services to users.

Payment and settlement system allows repayment and lending of money and also allows businesses to receive payments for offered goods and services. It facilitates the payment of salaries and benefits to the general public.  Securities Settlement Systems allow the purchase and sale of equities and bonds. It also affects settlement by book-entry as per predetermined multilateral rules.

What are the objectives of principles for FMIs, as published in 2012?

The primary objectives of these principles for FMIs are-

• To enhance safety and efficiency in payment;
• To enhance efficiency in clearing, settlement and recording arrangements;
• To limit systematic risk ; and
• Foster transparency and financial stability.

What are the provisions regarding the regulation and supervision of payment systems?

As per Chapter IV of the PSS (Payments and Settlements) Act, the powers to regulate and supervise comprise:

• Power to determine and prescribe standards;
• Notice in case of any change in the payment system;
• RBI has the power to call for returns, documents or other information;
• Access to information by the RBI;
• RBI has the power to enter and inspect any premises;
• RBI has the power to carry audit and inspection;
• RBI has the power to issue a specific direction;
• Power of RBI to give directions generally; and
• Every direction from the RBI must be complied with.

What are the Financial Market Infrastructures regulated by the RBI?

One of the fundamental responsibilities of the regulatory authorities is to define and publicly reveal the criterion that is used to identify FMIs that must be subject to regulation, supervision, and oversight by the RBI.

The RTGS (Real Time Gross Settlement) system is the only large-value payment system operational in India, and the value of the transactions processed as a percentage of total payment transactions is 77% in the month of March 2020. It is the only FMI operated by the RBI, a powerful and effective tool if misused, will wreck the financial system of India.

Clearing Corporation of India Limited (CCIL) is used in the private sector and functions as a central counterparty in different segments of the financial markets regulated by the RBI. It is designated as an FMI by the RBI. RBI has also designated it as a trade repository for OTC interest rate, credit and forex derivative transactions as instructed from time to time.

NPCI (National Payments Corporation of India^[1]) is an umbrella organization for operating the retail payment system in the country. Its share stood at 64.5% by volume against the entire payment landscape of India.

What is the objective of RBI as an oversight body?

RBI as an oversight body aims for:

Which entities are covered under the “Oversight Framework for Financial Market Infrastructures and Retail Payment Systems”?

The entities covered under this framework and the activities to be performed are as follows:

• RTGS System

The Real-Time Gross Settlement system is owned as well as operated by RBI.

• CSD- SSS

The Central Securities Depositary – Securities Settlement System for the government securities system is operated by PDO/Mumbai office.

• CCIL

Clearing Corporation of India Limited is required to disclose self-assessment on compliance with PFMIs on an annual basis. An on-site inspection and assessment of CCIL must be undertaken by DPSS (Department of Payment and Settlement System) annually or must be conducted externally. Before the onsite inspection is conducted, an onsite compliance audit must be undertaken to verify compliance against inspection observations.

With a view to ensure the resilience of the system, CCIL must conduct operations review on a monthly basis and undertake an IT system review by external auditors and must also submit a System Audit Report annually. Prior approval from RBI is necessary before initiating any changes in the systems or processes and also before introducing a new product, and in case of any abnormal developments, the same must be intimated to the RBI by the CCIL.

Conclusion