The Bangko Sentral ng Pilipinas (BSP) is implementing changes to check clearing and settlement based on its amended intraday settlement facility (ISF), the central bank announced Friday, Jan. 5, 

The circulars containing the ISF amendments were released last November 2023. The amendments to the regulations on the return of banks’ bounced checks, and on the rollout of the ISF are main features of one of two BSP circulars approved two months ago.

“These are part of BSP’s broader policy reforms aimed at further enhancing the efficiency and safety of the country’s payment system,” said the BSP.

Another highlight in the circular is the termination of the overdraft credit line (OCL) which is a liquidity facility, since its function will already be covered by the ISF. The announcement to cancel the OCL was approved in a circular dated Nov. 10, 2023 and in another one dated Nov. 13, 2023.

The ISF, which used to be referred to as the intraday liquidity facility or ILF, is part of long-running amendments to the BSP’s peso-denominated real time gross settlement (RTGS) payment system to ensure financial stability and the management of risks.

Based on BSP Circular No. 1180, the check clearing and settlement regulations were amended by the termination of the OCL because its “limited purpose of addressing overdrafts arising from check clearing losses is covered” by the ISF “that the banks can use not only for the settlement of check clearing results but also for any other local currency real-time gross settlement.”

Meanwhile, BSP Circular No. 1181 amended the ILF and renamed it to ISF as its operation has been automated.

The circular also aligned regulations with legal and statutory requirements as well as made the rules comply with the Principles for Financial Market Infrastructures (PFMI) particularly on credit risk, collateral, liquidity risk and related principles, said the BSP.

As for check clearing and settlement, the BSP said on Friday that “currently, banks have until the next banking day to return bounced and defective checks to the presenting bank, with the transfer of funds to the drawee bank dated on the day of the check’s deposit.”

“This practice of retroactive dating, however, causes changes in the balances of banks’ settlement accounts with the Philippine Payments and Settlements System-Plus (PhilPaSSplus), the BSP-operated facility that enables check settlement,” it said.

The BSP said to mitigate settlement and liquidity risks that may arise from the mismatch, the revised rules provide that banks may return high-value, “not sufficiently funded” or NSF, and defective checks as early as the day these are deposited.

“Banks will still be allowed to return NSF and questionable checks the next banking day, but settlement will no longer be backdated.  As a result, the amended check policy ensures certainty of funds transfer from the check issuer to the payee. Hence, aside from improving confidence in the check clearing and settlement system, the enhanced policy enables better fund management among check users,” explained the BSP.

Moreover, it added that in check clearing, banks will no longer be allowed to incur overdrafts, or to draw funds exceeding what a bank’s demand deposit account (DDA) holds.

“With this, banks no longer need to tap the BSP’s OCL. The experience of financial consumers, however, will not be affected by the amended policy in terms of withdrawability of check deposits on the next banking day at the latest,” said the BSP.

The central bank has also reintroduced the PhilPaSSplus ISF. This is to “reflect operational changes arising from BSP’s adoption of global payment standards and the full automation of this system (since) the facility allows banks to obtain funds from the central bank to prevent gridlocks due to timing mismatch in the settlement of payments at PhilPaSSplus.”

The BSP said Friday that the amended check policy will be implemented three months from its effectivity date, which is 15 days after its publication. The ISF regulation, meanwhile, shall be enforced three months from date of publication, it added.

“The transitory period for the latter will allow banks to make appropriate internal changes in compliance with revised regulations.  Upon the lapse of said period, BSP shall close the OCL and the ISF shall become the sole central bank-operated funding facility,” said the BSP.

As for the PhilPaSSplus, the amendments will enable an efficient and low-risk settlement of large-value fund transfers between financial institutions. “It also settles retail payment clearing transactions, ensuring that individuals, businesses, and the government can securely send and receive money through several channels, such as check, automated teller machine, InstaPay, and PESONet,” said the BSP.

Basically, the ISF will make sure that payments smoothly flow through the RTGS payment system and that interdependent settlements are executed in a timely manner to manage systemic risk.

The RTGS, as defined by the BSP, is a system that provides real time settlement of payments, transfer instructions, or other obligations individually on a transaction-by-transaction basis.

The BSP said the RTGS payment system is “critical” in maintaining price and financial stability, as well as preserving public interest.