2005 Self-assessment of the Reserve Bank Information and Transfer System General Background
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0.1 Overview
The vast majority (by number) of payments in Australia are for low-value transactions, however, these make up only a small percentage of the value of transactions. By value, around 90 per cent of interbank settlements are through RTGS. The remainder are through deferred net clearing arrangements. See table below.
| Volume 000s | Value $ billion | |
|---|---|---|
| RTGS4 | 23.1 | 135.8 |
| – RITS5 | 0.2 | 8.1 |
| – HVCS6 | 20.4 | 95.0 |
| – Austraclear7 | 2.5 | 32.7 |
| Deferred Net8 | ||
| 9am Batch9 | ||
| – Paper | 2,200 | 7.1 |
| – Direct Entry | 4,700 | 24.2 |
| – ATM/EFTPOS | 11,400 | 1.4 |
| CHESS10 | 89 | 3.4 |
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4 Source: Reserve Bank Bulletin Table C6. 5 Cash transfers related to money market transactions. 6 The Australian Payments Clearing Association (APCA) High Value Clearing System. APCA is an industry body responsible for the development and maintenance of industry clearing and settlement procedures for the major payments clearing systems. Payments in the HVCS mainly relate to large-value customer payments, including the Australian dollar leg of foreign exchange trades. 7 A securities clearing and settlement facility owned by Austraclear Limited, an entity owned by the SFE Corporation Limited. 8 Value and volume refer to payment instructions. Net interbank settlement obligations are lower. 9 Source: APCA 10 The Australian Stock Exchange (ASX) Clearing House Electronic Sub-register System (CHESS). Settlement of all ASX equities trades is effected through CHESS. Source: ASX |
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Interbank payment obligations are settled across Exchange Settlement Accounts (ESAs) at the Reserve Bank. Large-value electronic payments and payment obligations that arise from settlement of Commonwealth Government securities trades and other debt securities are settled on a RTGS basis. Most deferred net payments settle in a single batch at 9:00 am each morning (the ‘9am batch’). However, equities settlements occur daily in a separate net batch.
0.2 Legal and Regulatory Framework
0.2.1 Legal Framework
The Reserve Bank Act 1959 establishes the Payments System Board of the Reserve Bank. The Payments System Board is responsible for determining the Reserve Bank's payments system policy in a way that will best contribute 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 Payment Systems (Regulation) Act 1998 gives the Reserve Bank powers to regulate the payments system. This Act allows the Reserve Bank to obtain information from payment system participants, to designate a payment system, and to set access regimes and determine risk control and efficiency standards for designated payment systems.
The Payment Systems and Netting Act 1998 allows the Reserve Bank to provide legal certainty (in approved RTGS payment systems) for transactions carried out on the day of appointment of an external administrator. See ‘zero-hour rule’ in section 1.3.
The Payment Systems and Netting Act also gives legal certainty to multilateral netting arrangements which are approved by the Reserve Bank. Other provisions in this Act give certainty to netting in financial markets, such as that undertaken by the Australian Stock Exchange (ASX) and the Sydney Futures Exchange (SFE). They also provide the legal certainty required in multilateral netting schemes aimed at reducing foreign exchange settlement risk.
The Cheques Act 1986 is the principal piece of legislation dealing with paper payment instruments in Australia. It establishes the framework under which cheques are drawn, accepted and paid. This Act was amended in 1998 to allow non-bank authorised deposit-taking institutions to issue cheques in their own right. This Act also allows for the turnback, or presumed dishonour, of cheques for which a failed drawee institution has not settled.
Provisions in the Trade Practices Act 1974 dealing with restrictive trade practices and consumer protection are relevant to the operation of the payments system. The Act prohibits conduct such as price agreements, boycotts and exclusive dealing with the purpose or effect of substantially lessening competition. The Australian Competition and Consumer Commission (ACCC) may, however, authorise such conduct if it judges it to be in the public interest. The regulations and procedures for the five clearing streams operated by the Australian Payments Clearing Association (APCA) have been authorised by the ACCC. There are also provisions in the Trade Practices Act giving the Australian Securities and Investments Commission (ASIC) consumer protection powers in relation to the finance sector.
0.2.2 Regulatory Framework
There are four main regulatory bodies that have responsibilities for aspects of payment systems.
Reserve Bank of Australia
The Reserve Bank is Australia's central bank. The Reserve Bank is responsible for payments system oversight as well as fulfilling several other payments-related roles. The Reserve Bank operates under the Reserve Bank Act 1959, and most of its powers and functions in the payments system derive from that Act and the Payment Systems (Regulation) Act.
The power to determine and carry out the policy of the Reserve Bank (other than payments system policy) is vested in the Reserve Bank's Board, which comprises the Governor as chair, its Deputy Governor, the Secretary to the Department of the Treasury and up to six other members drawn from various sectors of the economy.
The power to determine the Reserve Bank's payments system policy resides with the Payments System Board. This includes the exercise of responsibilities under the Payment Systems (Regulation) Act and the Payment Systems and Netting Act. The Payments System Board comprises the Governor as chair, one other Reserve Bank appointee, an appointee from the Australian Prudential Regulation Authority and up to five other members.
The Payments System Board's mandate is set out in the Reserve Bank Act. It is responsible for determining the Reserve Bank's payments system policy in a way that will best contribute 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.
Australian Prudential Regulation Authority (APRA)
APRA is Australia's prudential regulator. It has responsibility for the supervision of banks, building societies, friendly societies, credit unions and specialist credit card institutions, which are participants in the payments system and offer payment services to users such as cardholders and firms.
Australian Competition and Consumer Commission (ACCC)
The ACCC is Australia's competition regulator. It is responsible for ensuring that payments system arrangements comply with the competition and access provisions of the Trade Practices Act. It may exempt the conduct of organisations and arrangements from the competition provisions if it judges it to be in the public interest. It may also accept undertakings in respect of third-party access to essential facilities.
The Reserve Bank also has responsibility for promoting competition in the market for payment services and, under the Payment Systems (Regulation) Act, may impose an access regime on participants and/or set standards for a system. The ACCC and the Reserve Bank have agreed a Memorandum of Understanding to ensure a coordinated policy approach. The intent is that the ACCC retains responsibility for competition and access in a payment system unless the Reserve Bank imposes an access regime or sets standards for that system.
Australian Securities and Investments Commission (ASIC)
ASIC has responsibility for market integrity and consumer protection across the financial system, including payment transactions. It administers the Corporations Act 2001 and regulates Australian corporations, financial markets, clearing and settlement facilities (in conjunction with the Reserve Bank) and financial service providers. The major functions of ASIC include the oversight of financial market and clearing and settlement facility licensees, licensing of financial service providers (includes securities dealers and advisers), registration of auditors and liquidators, and investigating and enforcing corporate and securities law.
The Reserve Bank also has specific responsibilities for establishing and monitoring compliance with financial stability standards, and for ensuring that clearing and settlement facilities do all things necessary to reduce systemic risk. Accordingly, ASIC and the Reserve Bank have agreed a Memorandum of Understanding in relation to clearing and settlement facilities that sets out a framework for cooperation between ASIC and the Reserve Bank that is intended to promote transparency, help prevent unnecessary duplication of effort and minimise the regulatory burden on facilities. It covers information sharing, notification and other arrangements intended to achieve these aims.
0.3 Description of Australia's RTGS payment system
RITS is Australia's RTGS payment system. As well as RITS cash transfer transactions, RITS also settles obligations arising between financial institutions as a result of the exchange of large-value payments in the High Value Clearing System (HVCS)[1], and the settlement of debt securities trades in the Austraclear system.[2] RITS also provides for the net settlement of interbank obligations arising from low-value payments transactions (on a next-day basis) and those arising from equities settlement in the ASX's Clearing House Electronic Sub-register System (CHESS).
RTGS was introduced in Australia on 22 June 1998. In RTGS, processing and settlement of transactions takes place continuously and irrevocably in real time using credit funds in banks' ESAs. RTGS was instituted mainly to eliminate the settlement risk associated with domestic interbank high-value payments and to promote the overall efficiency of Australia's wholesale payment system.
Final settlement of payments system obligations occurs through ESAs at the Reserve Bank. These accounts must be maintained in credit at all times, and the Reserve Bank pays interest on overnight balances in these accounts. Banks and other ESA holders access ESAs through RITS.
The figure below illustrates the various functions of RITS.
