PBC Official Answered Press Questions on Phase 2 of RMB Cross-Border Interbank Payment System

I. What’s the background of developing CIPS (Phase 2)?

In order to further integrate RMB cross-border clearing channels，improve RMB cross-border settlement efficiency, meet the need of cross-border trade development, support real economy and the going global strategy, the PBC has launched the RMB Cross-Border Interbank Payment System (hereinafter referred to as the CIPS), paving a “highway” for RMB internationalization. Considering the market demand and operation difficulty of different functions, the PBC has decided to build the system in phases. Phase 1 of CIPS went into operation on October 8, 2015, putting in place an institutional framework and basic arrangements in line with international standards and common practices. CIPS (Phase 1) adopted real-time gross settlement (RTGS) to support remittance by clients and by financial institutions and other payment services. Since its operation, CIPS (Phase 1) has generally met the settlement need of RMB in cross-border trade, investment and financing in major time zones, and effectively facilitated the global use of RMB.

In recent years, under the leadership of the CPC Central Committee and the State Council, in order to support the financial sector to better serve the real economy, and in line with market demands, the PBC has steadily promoted RMB internationalization, and has witnessed an elevating international status and increasing global usage of RMB. Accordingly, the demand for RMB cross-border payment and settlement has been on the rise, requiring better support from financial market infrastructures. Against this backdrop, the PBC accelerated the construction of CIPS (Phase 2), added more functions step by step, and provided the necessary supporting arrangements, so as to further improve the efficiency of RMB cross-border clearing and settlement, and offer more stable, convenient, flexible and efficient RMB clearing and settlement services for RMB businesses worldwide.

II. Compared with CIPS (Phase 1), which functions and characteristics of CIPS (Phase 2) have been improved?

Firstly, CIPS (Phase 2) has more settlement modes. The deferred net settlement (DNS) has been introduced on the basis of the real-time gross settlement (RTGS) to offer a liquidity-saving hybrid settlement mechanism so as to meet diversified demands of CIPS participants. Secondly, the CIPS (Phase 2) supports financial market transactions. According to the settlement needs of different financial transactions, CIPS (Phase 2) is designed to support RMB payment for DvP (Delivery versus Payment), PvP (payment versus payment) in RMB and foreign currency, settlement of centralized clearing of CCP, and the RMB settlement of other cross-border transactions. Thirdly, CIPS (Phase 2) has longer service hours. The operating hours of CIPS have extended from 5×12 to 5×24+4 hours, covering the working hours of financial markets in every time zone around the globe, enabling same-day RMB settlement for all overseas participants and their customers. Fourthly, CIPS (Phase 2) allows a wider variety of direct participants. A new category of financial market infrastructure direct participants are introduced and  different access criteria are specified for different categories of participants to lay the institutional and operational groundwork and to prepare for access of more overseas direct participants. Fifthly, CIPS (Phase 2) has a better message design. CIPS (Phase 2) has offered more message types and more optional items in messages, improved definition of relevant fields in the message formality, making it more convenient for participants and relevant authorities to conduct compliance management. Sixthly, a CIPS backup system is established in Wuxi City, Jiangsu Province, which allows real-time data copying from the main system in Shanghai, and thus enhances continued operation capacity of CIPS.

III. What changes have been made to the institutional framework of CIPS?

Based on the overall design of CIPS and international practices, the PBC has modified the institutional arrangements  and released the Provisional Rules on Business Operation of RMB Cross-border Inter-bank Payment System (Yin Fa No.72 [2018]) (hereafter referred to as the Rules). The Rules uses globally-acceptable terminologies to facilitate international development of CIPS business, focuses on liquidity risk management requirements and prevention of settlement risks, include access criteria for overseas direct participants and rules for processing financial market transactions, and specified the execution method and discipline of participant behaviour.

The operating institution of CIPS has, in line with the Rules, issued revised edition of the Guidelines on Business Operation of RMB Cross-border Interbank Payment System as well as other supporting rules and technical specifications, so as to maintain institutional integrity and consistency of CIPS.

IV. How does CIPS (Phase 2) implement the hybrid settlement mechanism?

To satisfy diversified settlement demands of RMB cross-border transactions, facilitate development of cross-border e-commerce, and provide participants with more flexible liquidity-saving arrangements, CIPS (Phase 2) has introduced the DNS on the basis of the RTGS of CIPS (Phase 1), and put in place the hybrid settlement mechanism. The RTGS is suitable for processing time-pressed, large-value, deal-by-deal payment scenarios, while DNS is suitable for processing frequently occurring, small-value payment scenarios as it is based on liquidity-saving algorithm with equal focus on security and efficiency, which makes position management more convenient for participants.

With CIPS (Phase 2), all direct participants can initiate RTGS operations. Based on risk control needs of the DNS, the direct participants that comply with prudential management requirements and can launch DNS services when their business scenario is in line with regulatory requirements. CIPS has adopted multiple mechanisms to fend off DNS-related settlement risks, including clarifying access criteria, setting quotas, requiring prior-funded balance and giving DNS top priority in queuing.

V. What are the operating hours of CIPS (Phase 2)?

Starting from May 2, 2018, the CIPS operates 24 hours a day on the statutory working days of China, with its operating hours modified to 5×24+4 hours. The system handles businesses in two sessions, namely a day session and a night session. The daytime session on normal working days lasts from 8:30 a.m. to 5:30 p.m. (the period from 5:00 p.m. to 5:30 p.m. is the end-of-session processing stage for returning to zero balance and other operations). Given the time zone of China, the day session on the first working day of every week and after national holidays is brought forward to 4:30 a.m. The night session on normal working days lasts from 5:00 p.m. to 8:30 a.m. on the next natural day (the period from 8:00 a.m. to 8:30 a.m. is the end-of-day processing stage for returning to zero balance and other operations).

The adjustment to the operating hours of CIPS is a major effort to keep pace with the RMB internationalization and two-way opening-up of the domestic financial market. After adjustment, the operating hours of CIPS cover the working hours of financial markets in every time zone around the globe, support the payments and financial market operations worldwide, and meet the need of RMB users around the world.

VI. How has the participant management changed in CIPS (Phase 2)?

Based on the established tiered participant arrangement system, CIPS (Phase 2) further specifies participant requirements, enhances the management on all stages of operations(that is, before, during and after), regulates the businesses behavior of participants, and promptly identify and manage relevant risks. Firstly, in the principles that “businesses in the same category are subject to the same standards” and that foreign and domestic enterprises shall be treated as equals, different access requirements are made clear for different categories of participants based on their jurisdictions, businesses characteristics and risks. Secondly, a dynamic assessment mechanism is established to enhance the day to day management of participants and stress discipline. Thirdly, a post-operation management mechanism for participants is established to regulate dispute settlement.

VII. After the launch of CIPS (Phase 2), how has the participant access management changed?

1. Access Requirements for Direct Participants

According to the Rules, legitimately established banking financial institutions and operators of financial market infrastructures can apply to become direct participants of the CIPS. The institutions that belong to the same legal person entity within a jurisdiction can apply for only one direct participant status.

The access criteria for banking institutions applying for direct participant status are as follows: with a legal person status or being the institution designated by a legal person entity; have the qualification for RMB settlement businesses; being a domestic institution with an settlement account in China’s High Value Payment System (HVPS) or a foreign institution that has entrusted a domestic bank direct participant as its fund custodian bank; supporting centralized processing and straight-through processing and meeting the information security and system reliability requirements; and having feasible mechanism in place to prevent and mitigate liquidity risk.

The access criteria of financial market infrastructure applying for direct participant status are as follows: being a legal person entity that handles financial transactions and fund settlement in RMB; supporting centralized processing and straight through processing and meeting the information security and system reliability requirements; and have feasible mechanism in place to prevent and mitigate liquidity risk. A domestic institution that intends to open an account with in the CIPS should have a settlement account with the HVPS.

As overseas institutions are from a different jurisdiction, such applicants applying for direct participant status shall meet the following criteria in order to avoid conflict of laws: an overseas banking institution shall obtain an opinion letter from the central bank or monetary authority of its original jurisdiction; in the case that it has no commercial presence within the territory of China, it shall meet other relevant prudential requirements of the PBC.

In addition, overseas financial market infrastructures shall obtain an opinion letter from itslocal regulatory authority; in order to open an account with the CIPS, an overseas financial market infrastructure shall entrust a domestic banking direct participant as its fund custodian bank.

2. Access Criteria for Indirect Participants

Banking financial institutions legitimately established within the territory of China can apply for indirect participant status in the CIPS. An applicant should be a legal person or an institution designated by a legal person, and is able to conduct centralized processing of its domestic business.

VIII. Are there any supporting institutional arrangements for guarding against systemic settlement risks in the CIPS?

With abundant institutional arrangements, the CIPS can support participants in properly managing their liquidity and ensure smooth handling of cross-border payment businesses. Firstly, the direct participant access and exit mechanism is established to ensure that only institutions with sound liquidity management capacity can participate in the system and conduct relevant businesses. Secondly, the CIPS supports a direct participant in securing liquidity from their HVPS accounts (that of it fund custodian bank) through initial pre-funding,  supplemental fund transfer  and fund withdrawal. Thirdly, it offers such auxiliary functions as queue management, balance early-warning, and automatic notifications of fund shortage. Meanwhile, direct participants can leverage the trading platform of the National Interbank Funding Center to secure liquidity through interbank lending in accordance with related provisions. The CIPS (Phase 2) does not provide day session overdraft to direct participants for the time being.

After adjustment, the night session of operating hours of CIPS (Phase 2) overlap with the operating hours of European and US financial markets. Meanwhile, the upcoming DNS businesses will raise requirements for participant liquidity management. Therefore, the PBC has decided to add a night session for the interbank money market. The direct participants of CIPS can, based on their settlement needs, borrow on the interbank money market for replenishment of their CIPS accounts. The new institutional arrangement can meet the need of domestic and foreign direct participants’ in liquidity adjustment at night, ensure security of payment and clearing, facilitate the integration of the domestic and overseas financial markets, and support the healthy development of China’s financial market. In the future, the CIPS can gradually offer access to RMB business participants globally and promote the opening-up of China’s financial market and RMB internationalization.