Are there any rules for the Difficulty or damage settings? Are there any rules at all?

Seperating the difficulties is a good idea, however, I would suggest 4 difficulties instead of 3, because choosing Apocalypse on Difficulty 3 the game will skip the last boss fight against Apocalypse. Also, 1 Round per opponent should be the default.

I would love help you to moderate this game. However, I have basically no knowledge about the PSX Game.