2005 Self-assessment of the Reserve Bank Information and Transfer System Core Principle II

The system's rules and procedures should enable participants to have a clear understanding of the system's impact on each of the financial risks they incur through participation in it.

2.1 Assessment of Compliance

RITS complies with this principle. As a RTGS system, RITS participants are not subject to credit risk as part of the settlement process. The documentation made available to members includes information that would enable them to have a good understanding of their liquidity risk and how to manage it.

2.2 Rules and Procedures

The RITS Regulations identify the obligations and rights of the participants and the system operator and set out how the system operates (including arrangements for settlement) and its operating hours.

Where changes to the RITS Regulations occur, updated documents are circulated to all RITS members. Details of amendments are also generally notified electronically through email.

Training of an operational nature is provided to all new RITS members and is available to other members on request. Training takes the form of staff attending a presentation by the Reserve Bank on the key features of RITS (including management of payments) and performing transactions on a test environment. New members are given access to the test environment from their own offices prior to going live to enable them to perform more testing and familiarisation activities. A general round of refresher training is offered to all members periodically, to allow them to send new staff for training.

An interactive training CD covering all aspects of RITS has been provided to all members. User Guides issued to all members contain detailed information on the features of RITS and use of its functions.

2.3 Financial Risks

RITS is a RTGS system; therefore credit risk arising from settlement does not accrue between participants. Transactions in RITS are irrevocable once settled. Insolvency of a participant would result in the ESA and RITS membership of that participant being suspended and transactions between that party and other participants would immediately cease to settle. Transactions previously settled are protected from application of the zero-hour rule by an approval under the Payment Systems and Netting Act.

Settlement funds used by RITS are funds held in ESAs at the Reserve Bank. ESAs cannot be overdrawn. Liquidity risk is mitigated by the design of the system queue, which uses a liquidity efficient algorithm, a bilateral offset mechanism and provision of intraday liquidity. Intraday liquidity (with no interest charge) is provided to ESA holders by the Reserve Bank through intraday repurchase agreements. A repurchase agreement is a purchase of cash (an ESA credit) and a sale of eligible securities^[1] with an agreement to reverse the transaction at a future time.^[2] There is no cap on the amount of intraday liquidity that an institution may access, other than the value of eligible securities it holds or may obtain for repurchase agreements.

The Reserve Bank offers an Overnight Repurchase Agreement Facility to enable holders of ESAs to borrow overnight from the Reserve Bank if they are unable to source sufficient liquidity from the market to meet their settlement obligations. The facility is designed to avoid dislocations in the payments system that can arise from liquidity pressures emerging at the end of the day. Eligible securities/instruments for this facility are the same as those eligible to be used in the intraday repurchase agreement facility. The interest rate on overnight repurchase agreements is 25 basis points above the target cash rate. Intraday repurchase agreements can be converted to overnight repurchase agreements.

Any change to the Reserve Bank's policy on provision of liquidity or range of eligible securities is announced by media release and made available on its website (www.rba.gov.au).

Footnotes

A haircut is taken on repurchase agreements (intraday and overnight or longer) to provide the Reserve Bank with cover against volatility in the price of the securities. See section 3.2.2. [1]

By the end of the RITS day for intraday repurchase agreements. [2]