2009 Self-assessment of the Reserve Bank Information and Transfer System Developments since the 2005 Assessment

In 2005, RITS was subject to both a self-assessment and an independent assessment by the International Monetary Fund (IMF), conducted as part of the Financial Sector Assessment Program (FSAP). As part of its aim of continuously enhancing RITS in response to market and technological developments, the Reserve Bank has implemented a number of significant changes since 2005. In particular, over recent years a number of enhancements have been made to operational risk management policy and business continuity arrangements, in accordance with evolving international best practice in this area. The Reserve Bank has also responded to a number of improvements suggested by the IMF in its FSAP assessment of RITS.

Business Continuity

RITS' business continuity arrangements have been enhanced substantially over the past four years. At the time of the FSAP, the Reserve Bank was in the process of building a new geographically remote backup site. Previously, the Reserve Bank's backup arrangements were split over two sites: a business recovery site, which provided an alternative workspace for critical staff located outside the CBD, and a geographically remote corporate recovery site, providing synchronous backup of IT operations. These functions were combined in mid 2007 at a new business recovery site. In addition, the new backup site offers full system redundancy on-site, through the duplication of equipment and links to service providers. Furthermore, the backup site is permanently staffed, thereby eliminating any delay in recovery time due to the need to relocate staff. Later this year, the Reserve Bank intends to commence rotating production operations between the two sites on a regular basis.

Information Security

At the time of the FSAP, implementation of a new, more secure, RITS user interface was well advanced. The member functionality aspect of this project was implemented in December 2006, bringing RITS security into line with international standards with respect to confidentiality, integrity and authenticity in the transmission of information and data. As part of the user interface project, the Reserve Bank introduced digital certificates to strengthen authentication, integrity and protection from non-repudiation. Secure Sockets Layer (SSL) technology was also implemented, providing end-to-end encryption for messages exchanged via a new internet browser-based user interface and across the Austraclear National Network Infrastructure (ANNI, a closed user group network used to access Austraclear and RITS). The launch of the highly secure browser-based interface also lowered the cost of RITS access to small participants through the option of using the internet to access RITS. The internet has also provided an alternative connectivity option in the event of problems with ANNI. Subsequently, the high standard of security in RITS has been verified in several external security reviews.

RITS Platform Upgrades

More recently, the Reserve Bank completed an upgrade to the RITS platform, including hardware, operating systems, databases and firewalls, which has reduced operational risk and improved recovery times. In February 2009, the RITS platform was upgraded to new software, including new versions of Open VMS and the Oracle Database. At the same time, the system was moved to a new storage area network and the network switches were upgraded.

Consultation with Users

In response to the IMF recommendation that the Reserve Bank establish a consultative framework with users, the Reserve Bank has set up a RITS User Group, with meetings held in Melbourne and Sydney every six months. In addition to these meetings, the Reserve Bank continues to liaise closely with industry through its membership of relevant APCA management committees for a number of clearing systems, particularly HVCS, and ad hoc working groups that have been established to co-ordinate specific projects. Communication with users has also been enhanced with the launch of the RITS Information Facility, through which all relevant RITS documents are available online.

Targeted Bilateral Offset

As a result of discussions with industry in these fora, the Reserve Bank has developed several enhancements to RITS. Most recently, the Reserve Bank implemented targeted bilateral offset functionality, a tool that assists participants in managing client credit constraints, while minimising liquidity needs. Using targeted bilateral offset, two members can select offsetting transactions to settle simultaneously. Such transactions might otherwise be delayed due to binding constraints on individual customer credit limits.

Low-value Feeder Project

The Reserve Bank is also working with APCA on a project to develop a ‘Low-value Payments Feeder’. The objective is to minimise the settlement risk associated with the deferred net settlement of retail payments, while at the same time simplifying access to the clearing network for direct entry and cheque transactions.

Currently, retail payments are settled on a net next-day basis in the ‘9am batch’. This delay in interbank settlement means that participants in these systems are exposed to credit risk associated with the settlement process (see section 3.2). The 9am batch process concentrates operational risk because other RTGS payments cannot be settled until the 9am batch is complete. In order to minimise the duration of the credit exposure, and reduce the concentration of operational risk in the single daily batch process, the Reserve Bank is developing functionality in RITS to allow same-day settlement of retail payments. With the development of this functionality, the Reserve Bank intends to work with the industry to migrate settlement of retail payments, starting with direct entry payments, away from a single daily batch process to multiple intraday settlements as files of payment instructions are exchanged between participants.

These files are currently exchanged across a web of bilateral links. To help simplify access to the clearing network, the Reserve Bank is developing an optional ‘switch’ for files of direct entry and cheque instructions. The switch will accommodate the different network preferences of various industry participants by enabling the transfer of files between networks (eg, SWIFT and the Community of Interest Network).^[1] The facility will also be able to translate files sent using different file-transfer protocols and therefore accommodate participants' preferences with respect to protocols.

Non-resident Participants

As part of their contractual obligations on joining RITS, non-resident participants agree to be subject to the non-exclusive jurisdiction of the courts of New South Wales. There are also special provisions in the Corporations Act to deal with the insolvency of a foreign company. Nevertheless, the IMF recommended that entities located outside the Australian jurisdiction that apply for participation in RITS, either as a branch or on a remote basis, be required to provide a legal opinion that analyses possible conflict of laws and potential legal risk for RITS and its participants. At this stage, the Reserve Bank has declined to require such legal opinions as it is not convinced that the potential benefits of gaining further legal certainty warrant the additional cost to new participants.

RITS Pricing

The IMF also recommended that the Reserve Bank consider reviewing pricing in RITS. The Reserve Bank regularly reviews RITS pricing but, to date, has decided against making any changes. The pricing structure is currently being reviewed in the context of new services being introduced. Users will be provided with the opportunity to provide feedback on any changes that may result from this review.

Oversight Arrangements

With respect to the Reserve Bank's responsibilities as overseer, the IMF recommended considering whether current arrangements avoid potential conflicts of interest between the policy and oversight functions, and the Reserve Bank's role as operator of RITS.

As the IMF noted, Australia has been a pioneer in establishing a separate board responsible for payments system policy and oversight. This separation is enforced up to and including the level of Assistant Governor, with Payments Policy Department responsible for payments system policy and oversight, while Payments Settlements Department is responsible for operating RITS. The Reserve Bank has decided not to implement separation at the senior executive level, as internal discussion at the Reserve Bank's Executive Committee offers considerable benefits, and other procedures are in place to identify and address any conflicts of interest that might arise.

The spirit of the IMF's recommendation has, however, been reflected in formalisation of oversight methods and procedures, including regular monitoring and reporting.

Footnote

The Community of Interest Network is a virtual private network that facilitates a single point of connection to the network for participants. [1]