2013 Self-assessment of the Reserve Bank of Australia –
Systemically Important Payment Systems 2. Overview of the Payments Landscape

2.1 Payments in Australia

Payment systems in Australia can be broadly divided into wholesale payment systems, which settle a relatively small number of high-value payments, and retail payment systems, which settle a large number of relatively low-value payments.

RITS is primarily a domestic wholesale payment system. In 2012/13 it settled an average of over 39,000 real-time gross settlement (RTGS) transactions each day, with an aggregate daily value of around $158 billion (Table 1).

The other major wholesale payment system operating in Australia is CLS Bank International (CLS), which is an international system that supports the settlement of foreign exchange trades. Over the same period, CLS settled on average 55,000 foreign exchange trades involving the Australian dollar each day, with the total value of the Australian dollar leg of these trades averaging around $252 billion. In contrast, there were almost 32 million non-cash retail payments each day in 2012/13, but their aggregate daily value was only around $59 billion. Similarly, the total value of the cash leg of equity settlements is relatively low, averaging around $4 billion each day in 2012/13.

2.1.1 Wholesale payment systems

RITS is the only domestic payment system operating in Australia that, in the Bank's view, needs to be overseen as a systemically important payment system and assessed against the Principles. In coming to this view, the Bank has considered the aggregate value of payments settled in RITS, which has averaged around $169 billion per day over the last five years (Graph 1), and RITS's share of domestic payments, which currently averages around 70 per cent.^[1] Furthermore, since RITS settles on a real-time basis it is used to settle time-critical payments, including Australian dollar CLS pay-ins (discussed below). RITS is also integral to the functioning of other payment systems, with the interbank obligations arising from non-cash retail payments, debt and equity securities settlements, and central counterparties' (CCPs') margin-related payments also settled in RITS.

CLS is an international payment system for settling foreign exchange trades in 17 currencies, including the Australian dollar.^[2] Since CLS settles a significant, and growing, value of Australian dollar-denominated foreign exchange-related payments, the Bank has identified CLS as a systemically important international payment system. CLS is regulated, supervised and overseen by the Federal Reserve, in cooperation with an Oversight Committee that includes the Bank and a number of other overseas central banks. Through this forum the Bank is involved in overseeing how well CLS meets the requirements of the CPSS Core Principles for Systemically Important Payments System (Core Principles), against which CLS has to date been required to submit biennial self-assessments.^[3] CLS is carrying out a gap analysis against the Principles, which it intends to complete by the end of 2013.

By operating a payment-versus-payment settlement mechanism, CLS allows participants to eliminate foreign exchange settlement risk (the risk that one party settles its obligation, while the other subsequently does not). Under these arrangements, settlement members either receive or pay a net settlement amount vis-a-vis CLS in each currency. Members meet any net Australian dollar payment obligation (known as a CLS pay-in) using RITS to make payments to CLS's Exchange Settlement Account (ESA) held at the Bank. CLS pays out net Australian dollar receipts in a similar way. The value of these pay-ins and pay-outs is only around 1 per cent of the gross value of trades involving the Australian dollar that are settled by CLS.

2.1.2 Retail payment systems

The payments industry is in the process of implementing a number of improvements to retail payments clearing and settlement arrangements that will provide end users with access to funds in a more timely manner. These initiatives include same-day settlement of direct entry (DE) transactions and a New Payments Platform (NPP). The NPP is expected to provide real-time transfers between bank accounts 24 hours a day, seven days a week, with close to immediate funds availability to recipients, richer remittance information, and functionality to ease the addressing of payments (see ‘Box A: Developments in Retail Payments Settlements Arrangements’ in Section 2 of the 2013 Self-assessment of the Reserve Bank Information and Transfer System for further details).^[4] These developments are likely to change the Australian payments landscape significantly, with potential migration to the NPP over the long term from other retail systems.

In 2012/13, DE payments represented almost 90 per cent of non-cash retail payments by value. DE payments represent an instruction from a bank account holder to his or her bank to pay (or collect) an amount directly to (from) another bank account. Instructions to pay are known as direct credit payments, whereas instructions to collect funds are known as direct debit payments.^[5] The DE system is governed by the Australian Payments Clearing Association's (APCA's) Bulk Electronic Clearing System rules. APCA is a self-regulatory industry body that is responsible for rules and procedures for clearing and settling payments, including High Value Clearing Stream payments, DE payments, cheque payments and ATM transactions in Australia.^[6]

The final important category of retail payment instrument in Australia is cards. There are two main types of debit cards issued in Australia: those issued for access to the domestic eftpos system (which is managed by ePal), and those issued as international scheme cards. The international card schemes also offer their respective four-party (MasterCard and Visa) and three-party (American Express and Diners Club) credit and charge card systems in Australia.

2.2 Regulatory Framework

The Bank has primary regulatory responsibility for Australia's payments system, including systemically important payment systems. The Bank also has an operational role, in which the Bank assumes responsibility for the day-to-day operation of RITS. The Bank's regulatory role is set out in the Reserve Bank Act, and requires that the Payments System Board determine the Bank's payments system policy in a way that best contributes to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with overall stability of the financial system. The Payments System Board comprises the Governor as chair, one other Bank appointee, an appointee from the Australian Prudential Regulation Authority (APRA), and up to five other members.

Most of the powers and functions of the Payments System Board derive from the Payment Systems (Regulation) Act 1998. This Act allows the Bank to obtain information from payments system participants, to designate a payment system, and to set access regimes and standards for designated payment systems. To date, these powers have been used solely in the retail space, most notably in the regulation of card schemes' interchange fees and in the establishment of access regimes for card schemes and the ATM system.

In addition, under the Payment Systems and Netting Act 1998, the Bank is able to ensure that settlement finality in approved RTGS systems and netting arrangements is legally certain. The Bank also has the power to determine that a settlement system is a recognised settlement system under the Cheques Act 1986, which allows for the turn back, or presumed dishonour, of cheques for which a failed drawee institution has not settled.

The Bank has concluded that powers under the Payment Systems (Regulation) Act are not currently needed to underpin the Payments System Board's oversight of systemically important payment systems. Since the only domestic payment system that meets the criteria for systemic importance is RITS, which is owned and operated by the Bank, effective oversight can be assured by internal governance arrangements within the Bank that separate operational and oversight functions, as well as by transparent Self-assessment against the Principles (see Section 3.2 for further details).

Relatedly, the Bank also has responsibilities in respect of CS facilities. Under the Corporations Act 2001, the Bank is responsible for ensuring that licensed CS facilities conduct their affairs in a way that causes or promotes overall stability in the Australian financial system. Accordingly, the Bank has determined Financial Stability Standards against which licensed CS facilities are formally assessed.^[7] These standards are aligned with the Principles.^[8]

Three other Australian regulators have an interest in the payments system:

• APR. APRA is Australia's prudential regulator. It has responsibility for the supervision of, among others, authorised deposit-taking institutions – including banks, building societies, credit unions and specialist credit card institutions – which are participants in the payments system and offer payment services to users such as households and firms. APRA develops and enforces prudential standards with the aim of ensuring that, under all reasonable circumstances, financial promises made by the institutions that it supervises are met within a stable, efficient and competitive financial system.
• Australian Competition and Consumer Commission (ACCC). As Australia's competition regulator, the ACCC is responsible for ensuring that payments system arrangements comply with the provisions of the Competition and Consumer Act 2010.^[9] This Act prohibits conduct such as price agreements, boycotts and exclusive dealing with the purpose or effect of substantially lessening competition. The ACCC may authorise such conduct if it judges it to be in the public interest, and indeed has done so in the case of the regulations and procedures for the five clearing systems operated by APCA. To ensure a coordinated policy approach on competition and access in the payments system, the ACCC and the Bank have agreed a Memorandum of Understanding (MOU). The intent is that the ACCC retains responsibility for competition and access in a particular payment system unless the Bank imposes an access regime or sets standards for that system.
• Australian Securities and Investment Commission (ASIC): ASIC has responsibility for market integrity and consumer protection for financial products in relation to payment transactions, and across the financial system more generally, under the Corporations Act. ASIC is also responsible for overseeing the licensing and regulation of CS facilities operating in Australia under the Corporations Act. ASIC's principal focus in carrying out this role is on the fair and effective provision of services. As discussed above, the Bank also has regulatory responsibilities for CS facilities, which are focused on protection from systemic risk. Given the shared responsibility for regulating CS facilities, ASIC and the Bank have agreed an MOU, which is intended to promote transparency, help prevent unnecessary duplication of effort, and minimise the regulatory burden on CS facilities.

Footnotes

This measure of payments is broader than interbank settlements, since it includes retail payments settled across the books of a commercial bank, such as payments between two customers of the same institution. It only includes CLS pay-ins and pay-outs in RITS, not the gross value of foreign exchange trades involving the Australian dollar settled in CLS. [1]

CLS also settles some one-sided payments related to credit derivatives, and offers an aggregation service that compresses large volumes of low-value foreign exchange trades for settlement. [2]

The Core Principles for Systemically Important Payments Systems are available at <http://www.bis.org/publ/cpssl06.htm>. [3]

2013 Self-assessment of the Reserve Bank Information Transfer System, available at <https://www.rba.gov.au/payments-and-infrastructure/rits/self-assessments/2013/>. [4]

A similar payment system is operated by BPAY, which offers enhanced functionality for bill payments. [5]

Some APCA rules and procedures are also relevant for EFTPOS. [6]

To date, licensed CS facilities have been assessed on an annual basis. In June 2013, Parliament passed the Corporations and Financial Sector Legislation Amendment Act 2013, which amends the requirement for the Bank and ASIC to conduct annual assessments of all CS facility licensees, to require annual assessments only of those CS facility licensees prescribed by regulation. Further to this, the Bank released a statement that articulates the criteria the Bank proposes to use in determining the frequency of regulatory assessments, and confirms which licensed CS facilities will continue to be subject to assessment on an annual basis. The statement is available at <https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/frequency-of-assessments.html>. [7]

The Financial Stability Standards are available at <https://www.rba.gov.au/payments-system/clearing-settlement/standards/>. [8]

The Competition and Consumer Act was previously known as the Trade Practices Act 1974. [9]