2009 Self-assessment of the Reserve Bank Information and Transfer System General Background
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1. The Reserve Bank Information and Transfer System
RITS is Australia's RTGS payment system. In RTGS systems, individual transactions are processed and settled continuously and irrevocably in real time. RTGS was introduced in Australia on 22 June 1998 to reduce the settlement risk associated with deferred settlement of high-value interbank payments and to promote the overall efficiency of Australia's wholesale payments system.
Over 90 per cent of interbank settlements, by value, in Australia are settled on a gross basis through RITS; this share has been broadly steady since RITS commenced operation in 1998. In 2008/09, RITS settled on average around 32,000 RTGS transactions each day, with a value of $184 billion (Table 1, Graph 1). On the peak-value day in 2008/09, RITS settled over 47,000 RTGS transactions worth a total of $289 billion. The levelling out in the volume of transactions and the fall in the value of transactions settled in RITS since mid 2008 is consistent with a decline in wholesale market activity since the financial market turbulence in late 2008.
RTGS payments can be entered into RITS directly, or delivered via two linked external feeder systems – the High Value Clearing System (HVCS) and Austraclear (Figure 1). HVCS is a Society for Worldwide Interbank Financial Telecommunication (SWIFT) closed user group established by APCA, an industry body that establishes rules and procedures for clearing and settling payments in Australia. HVCS is used primarily to submit customer payments to RITS, including CLS Bank obligations.[1] Austraclear transactions generally represent the cash legs of debt security transactions, which are settled on an RTGS basis. There is no minimum value for payments submitted to RITS, so time critical low-value payments can also be settled on an RTGS basis. The number of relatively low-value payments settled via RITS is significant and growing (Graph 2).
The interbank obligations that arise from the clearing of retail payment instruments are settled on a multilateral net basis in RITS. Bilateral net settlement obligations arising from each separate clearing stream, including cheques, direct entry (including obligations arising from the BPAY system) and cards (ATM, EFTPOS and credit cards), are provided to the Reserve Bank by each participant.[2] These are combined to calculate the overall multilateral net position for each participant, which is settled on a deferred basis at 9am the following business day. The cash legs of equities transactions also settle on a multilateral net basis, with obligations calculated by the Clearing House Electronic Sub-register System (CHESS), operated by ASX Settlement and Transfer Corporation (ASTC), and settled in a batch at around noon each day.
This self-assessment of RITS against the Core Principles is conducted only in respect of the RTGS part of the system (shown above the dotted line in Figure 1), and encompasses the net settlement systems only to the extent that they affect RITS’ compliance with the Core Principles.
In RITS, transactions are settled using credit funds held in participants’ Exchange Settlement Accounts (ESAs) at the Reserve Bank. As RITS is the means by which ESAs are accessed, all ESA holders are RITS settlement members. As of end June 2009, there were 67 RITS settlement members and 16 non-transactional RITS members. Non-transactional RITS members hold RITS membership either to participate in the Reserve Bank's open market operations or as batch administrators, but do not hold ESAs and instead settle any payments in RITS through an agent.
Smaller settlement members may also settle transactions through an agent, rather than directly across their own ESA; only eight settlement members chose to do so as of end June 2009.
RITS is designed to be liquidity efficient. It incorporates a central queue employing a liquidity-efficient ‘next-down looping’ algorithm that seeks to minimise liquidity needs by continuously searching through the queued payments to determine whether payments can be settled individually or by bilateral offset. The system's automated bilateral-offset functionality involves identifying offsetting payments between any pair of participants that are unsettled on the queue and testing them for simultaneous settlement to help prevent system gridlock.[3] Participants can also nominate specific offsetting payments to be settled simultaneously to assist in managing client credit constraints.
RITS participants also have real-time access to information on their settled transactions, queued transactions and ESA balance to assist in efficient liquidity management. Other design features of the system enable participants to reserve liquidity for priority payments by using the payment status and sub-limit features in RITS.
In combination, the liquidity-saving features within RITS help to ensure efficient recycling of liquidity. Liquidity turnover in RITS (the average number of times each dollar of liquidity is used to settle a payment) is currently around ten (Graph 3). The downward trend in liquidity turnover is likely to reflect the lower opportunity cost of liquidity as the Reserve Bank has gradually broadened the range of securities it accepts in return for liquidity in RITS (see below). At the margin, the increasing number of participants in RITS and the resulting greater dispersion of payments across RITS members may also have contributed to increased overall demand for liquidity. Nevertheless, the system remains concentrated, with the major Australian banks a counterpart to almost 60 per cent of transactions settled through RITS (Graph 4). More recently, the decline in liquidity turnover in RITS is likely to reflect the increase in participants’ demand for ESA balances (accommodated by the Reserve Bank) and the decline in value settled, both of which are associated with the turbulence in financial markets.
Liquidity in RITS is sourced from participants’ overnight ESA balances and additional funds made available to participants by the Reserve Bank via interest-free intraday repurchase agreements (repos). Access to these funds is limited only by participants’ holdings of eligible securities. The list of eligible securities was expanded in late 2007 to include securities issued by authorised deposit-taking institutions (ADIs), residential mortgage-backed securities and asset-backed commercial paper. While the Reserve Bank had been moving over time towards broadening the eligible securities for repos, the timing of this change was accelerated by emerging strains in financial markets and the associated increase in demand for liquidity. Participants’ demand for liquidity increased further with the worsening of financial market conditions in late 2008, following the bankruptcy of Lehman Brothers (Graph 5). The Reserve Bank accommodated the additional demand for liquidity by increasing the level of overnight ESA balances.
The effect of the increased liquidity in RITS in the past year can also be seen in the settlement profile of RTGS transactions. The volume of settlements peaks at around 9.30am, soon after the opening of the RITS day session, as offshore customer payment instructions received by participants earlier are submitted to the system (Graph 6).[4] The peak in the value of settlements is around 4.30pm, in part reflecting participants’ liquidity management strategies and the squaring of positions at the end of the day (Graph 7). This peak was slightly less pronounced in 2008 compared with recent years, partly reflecting the increased liquidity available to settle payments earlier in the day.
2. The Regulatory Framework
Four main regulatory bodies have responsibility for aspects of Australia's payments system. The Reserve Bank and the Australian Prudential Regulation Authority (APRA) hold the major regulatory responsibilities related to systemically important payment systems and their participants, respectively. The Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) also have responsibilities in this area, although these are more narrowly focused. The respective roles of these regulators in relation to the payments system are discussed below.
The Reserve Bank of Australia
The Reserve Bank has both an operational and regulatory role in Australia's payments system. As set out in the Reserve Bank Act 1959, the Payments System Board of the Reserve Bank 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 Payments System Board is comprised of the Governor as chair, one other Reserve Bank appointee, an appointee from 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 Reserve Bank to obtain information from payments system participants, to designate a payment system, and to set access regimes and standards for designated payment systems. In addition, under the Payment Systems and Netting Act 1998 (PSNA) the Reserve Bank is able to ensure that settlement finality in approved RTGS systems and multilateral netting arrangements is legally certain. The Reserve 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 turnback, or presumed dishonour, of cheques for which a failed drawee institution has not settled.
The Reserve Bank also has responsibilities relating to clearing and settlement facilities. Under the Corporations Act 2001, the Reserve Bank is responsible for ensuring that licensed clearing and settlement facilities conduct their affairs in a way that causes or promotes overall stability in the Australian financial system. As such the Reserve Bank has determined a set of Financial Stability Standards against which licensed clearing and settlement facilities are formally assessed at least once a year.[5] Within the scope of the Reserve Bank's financial stability role, these standards are broadly consistent with international recommendations for securities settlement systems and central counterparties developed jointly by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO).
Australian Prudential Regulation Authority
APRA is Australia's prudential regulator. It has responsibility for the supervision of, among others, ADIs – 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 consumers and firms. APRA develops and enforces prudential standards with the aim of ensuring that, under all reasonable circumstances, financial promises made by institutions it supervises are met within a stable, efficient and competitive financial system.
Other regulators
As Australia's competition regulator, the ACCC is responsible for ensuring that payments system arrangements comply with the provisions of the Trade Practices Act 1974. 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.[6] To ensure a co-ordinated policy approach on competition and access in the payments system, the ACCC and the Reserve Bank have agreed a Memorandum of Understanding (MOU). 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.
ASIC has responsibility for market integrity and consumer protection in relation to payment transactions, and across the financial system more generally, under the Corporations Act and the Trade Practices Act. ASIC is also responsible for the licensing and regulation of clearing and settlement 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 Reserve Bank also has regulatory responsibilities for clearing and settlement facilities, which are focused on protection from systemic risk. Given the shared responsibility for regulating clearing and settlement facilities, ASIC and the Reserve Bank have agreed an MOU, which is intended to promote transparency, help prevent unnecessary duplication of effort and minimise the regulatory burden on facilities.
Footnotes
CLS Bank is a bank chartered in the United States that is used by global financial market participants, including in Australia, to effect payment-versus-payment (PvP) settlement in the foreign exchange market. In offering PvP settlement, CLS is specifically designed to manage the risk that one party might pay away the currency it is selling and, due to the failure of its counterparty, not receive in return the currency it is purchasing. [1]
The Reserve Bank performs the role of ‘National Collator’ of clearing stream obligations on behalf of APCA. [2]
Gridlock refers to a situation in which the failure of some instructions to settle because of insufficient funds prevents a substantial number of other instructions from other participants from settling. [3]
The RITS day session begins at 9.15am. Prior to this, settlement is limited to interbank Austraclear and RITS transactions, and the 9am batch. [4]
2008/09 Assessment of Clearing and Settlement Facilities in Australia [5]
APCA currently co-ordinates and manages five clearing systems: the Australian Paper Clearing System (APCS) for cheques, the Bulk Electronic Clearing System (BECS) for direct entry, the Consumer Electronic Clearing System (CECS) for ATM and EFTPOS transactions, HVCS and the Australian Cash Distribution and Exchange System (ACDES). [6]