CB UAE's Large Value Payment Systems- 10 Takeaways

The Central Bank of the UAE (“CBUAE”) Large Value Payment Systems (“LVPS”) Regulation (the “Regulation”) (Link) came into force on the 10 February 2021. This Regulation was published alongside the Retail Payment System (“RPS”) regulation with the aim of promoting a robust financial infrastructure and building the essential framework for financial stability and consumer protection in the UAE.

The Regulation sets standards for financial infrastructure systems that support wholesale payment activities in the UAE. It covers licensing requirement, obligations, and requirements of LVPS and the powers the CBUAE’s has in relation to governance and enforcement under this Regulation.

Here are the key highlights from the Regulation:

1. What is an LVPS? An LVPS is a Financial Infrastructure System(s) (“FIS”) that supports the financial and wholesale activities in the UAE by providing clearing and settlement services designed to process large-value and or wholesale payments.

2. What are designated LVPS? Designated LVPS, as those which the CBUAE deems as systemically important. The CBUAE defines Systemically Important Financial Infrastructure System (“SIFIS”) as those systems, which have the potential to trigger or transmit systemic disruptions to the UAE’s monetary and financial stability. This includes systems that are the sole or principal FIS in a jurisdiction and systems that mainly handle time-critical, high value payments or settle payments used to effect settlement in other FIS.

3. What is an FIS? An FIS is either a clearing and settlement system or a RPS. Clearing is a function such systems, which is the process of transmitting, reconciling and possibly confirming transactions prior to settlement and this potentially includes netting of transactions. Settlement is simply the final closure of a transaction and netting is the conversion of various obligations, owed to or by a person towards another in the system, into one net obligation.

4. Who does this Regulation Apply to? This regulation will apply to all LVPS that operate within the UAE and those that accept the clearing or settlement of transfer orders denominated in the UAE AED, both within and outside the UAE. It will not apply to those operating in the financial free zones. All LVPS will require a license to operate from the relevant regulator, which is either the CBUAE or the relevant free zone regulator. However, the CBUAE will cooperate with regulatory authorities in the UAE and those in other jurisdictions, where necessary, on which parts of this Regulation may not apply to the concerned designated LVPS to avoid additional regulatory burden.

5. What powers does the CBUAE have as the regulator? The CBUAE has wide-ranging powers under the Regulation that cover regulating, licensing, designating of an SIFIS and requesting information. The CBUAE may request, where necessary, certain documents and information from whomsoever operates and functions the LVPS, this includes the corporation, individuals and relevant competent authorities that regulate the LVPS whether in the UAE or outside. Additionally, the CBUAE may request to discuss the nature and complexity of the system with the system operator or settlement institution.

6. Can the CBUAE revoke my license? The CBUAE may revoke a license where it finds the LVPS is not compliant with these Regulations. Separately, the CBUAE may revoke the designation as an SIFIS of an LVPS, where it has ceased or is likely to cease being an SIFIS. Where a CBUAE revokes a license, it will notify the LVPS or the relevant regulator with a report stating the grounds for revocation. Additionally, the CBUAE has the power to request any regulatory authority, whether in the UAE or elsewhere to revoke an LVPS license.

7. Can an LVPS appeal to the CBUAE? The LVPS can appeal the CBUAE for any grievances in relation to licensing and designation as an SIFIS. In the event of revocation, the LVPS will have no more than twenty (20) working days within which to appeal, in writing, stating why the grounds for revocation are invalid.

8. What are LVPS requirements under this Regulation? All LVPS must properly and efficiently operate their systems in compliance with this Regulation. In doing so, they must establish appropriate operating rules, especially in relation to default arrangements and final settlement. 

9. Principles of Financial Market Infrastructures- In addition to the requirements under this Regulation, all those who operate an LVPS must comply with the Principles of Financial Market Infrastructures (“PFMI”). PFMI are twelve (12) key international standards set by the Committee on Payment and Market Infrastructures (“CPMI”) and the Technical Committee of the International Organization of Securities Commissions (“IOSCO”). These principles are considered essential to safety, efficiency and transparency as well as harmonizing and strengthening financial stability. The principles incorporate specific minimum requirements in relation to credit, liquidity, general business risk to ensure a common level of risk management. Additionally, the CBUAE has the power to impose higher requirements than the PFMI, where necessary, based on specific risks posed by the LVPS or as a general policy. The PFMI apply to all designated LVPS and those LVPS operated by the private sector.

10. When must LVPS comply with these Regulations by? System operators and settlement institutions of existing LVPSoperating in the UAE must comply with the requirements of the Regulation by the ends of February 2022. This is when the one (1) year transitional period as mentioned in the Regulation expires.

 

 Authored by Bryce Mendonca (Junior Associate) with inputs from Akshata Namjoshi (Lead: Fintech, Blockchain and Emerging Tech).