2005 Self-assessment of the Reserve Bank Information and Transfer System Core Principle VIII
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The system should provide a means of making payments which is practical for its users and efficient for the economy.
8.1 Assessment of Compliance
While this principle requires considerable subjective assessment, the Reserve Bank's assessment is that RITS complies with this principle.
8.2 Objectives
The primary objective in establishing RITS was to eliminate the accumulation of interbank obligations throughout the day under the previous net deferred arrangements. RTGS was chosen as it addresses this problem at source by preventing the build-up of unsettled obligations. It was also recognised that RTGS was best practice.
A further objective was to make payment transactions legally robust. Under previous arrangements there was considerable doubt over whether multilateral netting arrangements were legally certain.
8.3 Liquidity Efficiency
RTGS systems, which settle payments on a gross basis, are intrinsically less liquidity efficient than systems that settle on a net basis.[1] The risk that RTGS might require greater liquidity than previous arrangements was addressed through the design of the queuing mechanism and provision of an intraday repurchase facility.
Participants make extensive use of intraday liquidity. RTGS was introduced in Australia at around the same time that Australian prudential supervision arrangements were reformed, and also following a relatively sharp decline in holdings of liquidity by banks. While it is difficult to disentangle the effects of these factors, the Reserve Bank's assessment is that there is no evidence to suggest that participants have had to increase their holdings of assets eligible for repurchase agreements as a result of the introduction of RTGS.
8.4 Needs of Participants
The Australian financial system is characterised by deep financial markets, a wide range of financial instruments and large values of foreign exchange transactions. Participants in these markets require a payments system providing prompt final settlement with minimum exposure to other participants.
Various options (including the introduction of Lamfalussy-compliant deferred net settlement arrangements) were explored prior to the Reserve Bank deciding to implement the RTGS system based upon its existing system (RITS[2]) that already provided access to members' ESAs.
Subsequent discussions involved senior bank officers from various institutions around Australia. Considerable liaison with participants was conducted in finalising the specifications for the RTGS system enhancements to RITS. A Cross-Project Steering Committee with representatives from the Reserve Bank, major banks, APCA and Austraclear Limited, and chaired by a Deputy Governor of the Reserve Bank, provided a forum for ongoing project discussions at a senior level.
Member banks, via the industry association APCA, were responsible for the decision to use SWIFT FIN-Copy (Y-mode) as the Payments Delivery System (PDS) for customer payments. This decision was supported by the Reserve Bank. Responsibility for the PDS is split between the Reserve Bank (the Central Institution) and APCA (the Closed User Group Administrator).
The Reserve Bank also involved the financial community more broadly at various conferences and meetings, including some organised by the Australian Society of Corporate Treasurers, the Securities Institute of Australia, the Custodial Services Group and the International Banks and Securities Association of Australia.
8.5 Participation
When RTGS was introduced in 1998, the Reserve Bank, as a matter of policy, required all banks to settle their high-value payments using funds held in an ESA at the Reserve Bank. This is referred to as direct participation.
The Reserve Bank was aware that internationally some payment systems involved indirect participation. Indirect participation is where payments of indirect participants become settlement obligations of a direct participant that has agreed to act on behalf of the indirect participant. The effect is that indirect participants settle across the books of direct participants, while direct participants settle their own and indirect participants' obligations. When a direct participant is responsible for the settlement obligations of a large number of indirect participants there is increased risk of systemic disruption arising from the failure of that direct participant.
The Reserve Bank was concerned that allowing indirect participation in RTGS might lead to a high degree of concentration of payments through a few direct participants. This was the case in several countries and was a matter of concern to their central banks. The Reserve Bank was also aware that indirect participants could be at a competitive disadvantage in offering payments services.
The Reserve Bank formed a view that broad participation in RTGS was preferable and as a matter of policy required all banks to make their own high-value payments in RTGS using their own ESA. The policy was relaxed in March 2003 to allow very small participants (accounting for less than 0.25 per cent of total payments, by value) to enter into agency relationships with other ESA holders for settlement of their RTGS transactions. To date, this has meant little change in participation arrangements. Currently only two (of 56) ESA holders have been approved to use an RTGS agent.
8.6. Operational Performance
RITS has excellent operational reliability. See section 7.3.
8.7. Costs
The Reserve Bank's objective is operational cost recovery. Currently, this is met by a flat transaction fee. ESA holders pay a fee for each RTGS debit and credit to their ESA, that is, each transaction incurs a fee of $0.88 (plus a Goods and Services Tax of 10 per cent) levied on the payer and the receiver of each RTGS transaction.
Participants can select the most cost-effective means of linking their proprietary payment processing systems to SWIFT to send customer payments to the central RTGS system, RITS, and to manage credit allocation to customers operating in the Austraclear system.
8.8. Capacity
A capacity plan setting out throughput performance requirements for the various elements of the system was devised during the development of RTGS. It is reviewed and updated periodically, and regular performance testing is carried out. System capacity requirements are set to accommodate projected volumes eighteen months in advance with 20 per cent headroom, and to allow a whole day's transactions to be processed in two hours. Based on recent throughput figures and expected growth, this equates to around 31,500 payments per day, or an hourly throughput requirement of 15,750 per hour. Recent testing results show that the actual throughput rate is over 20,000 per hour.