2015 Assessment of the Reserve Bank Information and Transfer System Appendix A: Background Information

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RITS is Australia's RTGS system. It is operated by the Bank and settles transactions across ESAs held at the Bank. In RTGS systems, individual payments are processed and settled continuously and irrevocably in real time. RTGS was introduced in Australia in June 1998 to eliminate the settlement risk associated with deferred net settlement of high-value interbank payments and to promote the overall efficiency of Australia's wholesale payments system. This background section presents an overview of the operational arrangements and key design features of RITS. Material changes to RITS since the 2014 Assessment are discussed in Section 3.

A.1 Governance and Oversight

RITS is owned and operated by the Bank. Since it is not operated as a separate legal entity, the management and operation of RITS fall under the governance structure of the Bank, and are therefore subject to its normal oversight, decision-making and audit processes. The Bank articulates specific objectives in relation to its operation of RITS on its website.^[13] These are consistent with the high-level objectives of the Bank, which emphasise the stability of the broader financial system and the welfare of the Australian people. The Bank accordingly aims to provide infrastructure through which settlement obligations arising from the exchange of high-value payments and debt securities settlements can be completed in a safe and efficient manner.

The governance structure as it applies to RITS is shown in Figure A.1. In accordance with the Reserve Bank Act 1959, the Governor is responsible for the management of the Bank, and is therefore ultimately responsible for the operation of RITS. The Governor is assisted and supported in this responsibility by the Executive Committee, which comprises the Bank's most senior executives. Day-to-day operations, liaison with participants, and the ongoing development of RITS are delegated to the Bank's Payments Settlements Department.

RITS is also subject to oversight by the Bank's Payments Policy Department, within the policy framework for which the Board has ultimate responsibility.^[14] In 2014, the Executive Committee established an internal FMI Oversight Committee to govern oversight activities within this framework. This Committee is chaired by the Assistant Governor (Financial System) and includes a further five senior members of Bank staff with relevant experience.

A.2 Systems Linked to RITS

RTGS payment instructions can be submitted to RITS directly (as two-sided payments known as RITS cash transfers), or through two feeder systems: SWIFT PDS and Austraclear. The SWIFT PDS is a closed user group administered by APCA, which sets rules and procedures for clearing payments in Australia through its High Value Clearing System (HVCS). The SWIFT PDS is used primarily to make one-sided customer and interbank payments, with interbank settlement occurring across ESAs in RITS. Austraclear transactions submitted to RITS for settlement generally represent the cash legs of debt security transactions, which are settled on a delivery-versus-payment model 1 basis. Payment instructions that are not associated with the settlement of securities transactions may also be sent for settlement via the Austraclear system. Other FMIs with ESAs (i.e. CLS, the ASX CCPs and LCH.Clearnet Ltd) use these feeder systems to settle Australian dollar obligations arising from the systems they operate.

While RITS is primarily an RTGS system, it also facilitates the multilateral net settlement of interbank obligations arising from other systems (Table A.1). The settlement of obligations arising in the retail payment systems administered by APCA is facilitated by the Bank's Low Value Settlement Service (LVSS) in RITS.^[15] All other multilateral net batches are administered by ‘batch administrators’ and entered into RITS through its batch feeder functionality.^[16]

A.3 Design Features

RITS is designed to enhance efficiency in the use of liquidity within the system. It incorporates a central queue and a ‘next-down looping’ algorithm that continuously retests unsettled payments in order of submission (Figure A.2). If the transaction being tested for settlement cannot be settled individually, the auto-offset algorithm searches for up to 10 offsetting transactions (based on the order of submission) between a pair of participants and attempts to settle these simultaneously.^[17] Participants can also nominate specific offsetting payments to be settled simultaneously to assist in managing client credit constraints; this functionality is known as ‘targeted bilateral offset’.

RITS participants have access to a range of information to enable them to manage their liquidity risk effectively. These tools provide participants with real-time information to manage their liquidity efficiently. In particular, RITS participants have access to information on their current ESA balances, settled payments and receipts, queued inward and outward transactions, the value of first- and second-leg intraday repos, and their projected end-of-day ESA balances.

RITS also has features that allow participants to efficiently manage and conserve liquidity.

Participants can use ‘sub-limits’, which they can change at any time during the settlement day, to reserve liquidity for priority payments (Figure A.3). There are three payment statuses available to participants, which determine how individual transactions draw on liquidity:

Payments with a deferred status are not tested for settlement until their status is amended.
Active payment instructions are settled as long as the paying institution has sufficient funds in their ESA above the sum of the participant's specified sub-limit and any property settlement reservations. Property settlement reservations are made upon receipt of a request from PEXA to cover participants' net obligations for a given property transaction prior to the settlement of the cash leg (which occurs after advice from PEXA that the relevant land titles office has confirmed to PEXA that the title transfer documents have been lodged).^[18]
Priority payments are tested against the ESA balance less any property settlement reservations.

This functionality can be accessed through either the RITS User Interface or via SWIFT messages. Participants can choose to change the payment status of each payment individually, or they can choose to automatically set the status of all payments of a particular type, and below a participant set threshold.^[19]

A.4 Liquidity Provision

To facilitate the settlement of payments in RITS, the Bank provides liquidity to participants at low cost via its Standing Facilities. Under these facilities, a participant can enter into a repo with the Bank; a repo transfers outright title to the Bank of eligible securities (upon purchase of securities) in return for a credit to the participant's ESA, with an agreement to reverse the transaction at some point in the future. Standing facilities are available to any RITS participant which is ‘approved’ by the Bank's Domestic Markets department and settles its payments across its own ESA.^[20]

There are three types of repos that can be performed under the Bank's Standing Facilities:

Intraday repos. For these repos, both the sale and repurchase occur on the same day. They are provided free of charge (except for a small settlement transaction fees), but must be reversed before the settlement of SWIFT and Austraclear transactions ceases in RITS each day.
Overnight repos. In the exceptional case that a participant is unable to reverse an intraday repo by the end of the day, the transaction may, with the approval of the Bank, be converted to an overnight repo. Interest would then be charged at 25 basis points above the cash rate target.
‘Open’ repos. This type of repo does not specify the date on which the transaction will be reversed. The participant retains the liquidity for use on future days. Open repos help participants meet their settlement obligations without having to actively manage their liquidity, particularly outside of normal banking hours. Open repos were introduced to facilitate the settlement of evening DE payment obligations, which are unknown prior to the close of the interbank cash market and Austraclear.^[21] For participants which settle DE obligations across their own ESA, the Bank determines a minimum position in open repos that the participant should maintain.^[22] To the extent that these participants retain matching funds against their open repo position (subject to an allowance for variations in ESA balances arising from DE settlements that occur outside of normal banking hours), those ESA balances are compensated at the cash rate target. However, to preserve the incentive for RITS participants to remain active in the interbank cash market while it is open, surplus ESA funds earn a rate 25 basis points below the cash rate target, while any shortfall in funds below the ESA holder's open repo position incurs a 25 basis point penalty.

Participants can also source liquidity through term repos and some outright transactions conducted by the Bank in the ‘open market’ each day – known as open market operations. The overall amount of ESA funds available via these operations is set by the Bank to support the implementation of monetary policy. These transactions usually involve counterparties selling debt securities to the Bank either under repo or outright.

In its repo arrangements, the Bank only purchases highly rated debt securities denominated in Australian dollars and lodged in Austraclear. RITS participants also have the option to use ASX Collateral to manage certain types of repos in a subset of eligible securities. ASX Collateral is a collateral management service developed by ASX Group in partnership with Clearstream, a Luxembourg-based FMI provider.^[23]

A.5 Access and Participation

Since settlement in RITS occurs using central bank money, only institutions that hold an ESA with the Bank can be settlement participants in RITS. Furthermore, since RITS is the only means of access to ESAs, all ESA holders must be participants of RITS, meeting all of its operating conditions. The eligibility criteria to hold an ESA with the Bank therefore effectively represent the eligibility criteria for settlement participants in RITS. Policy on ESA eligibility is set by the Bank's Payments Policy Department, under the governance of the Board, and is available on the Bank's website.^[24] The policy has been designed to be fair and open and promote competition in the provision of payment services by allowing access to all providers of third-party payment services, irrespective of their institutional status. ADIs are eligible by default, because these institutions are assumed to provide third-party payment services as part of their business. Australian-licensed CCPs and securities settlement facilities (SSFs) with payment arrangements that require Australian dollar settlement are also eligible to hold an ESA.^[25]

The ESA policy sets a number of risk-based participation requirements, including around operational capacity and access to liquidity, these are designed to reduce the likelihood that an individual participant experiences an operational or financial shock that could disrupt the system more broadly. The application of participation requirements aims to be proportional to a prospective participant's expected payments business in RITS. To reduce the operational burden on smaller RITS participants, any ESA holder (other than a systemically important CCP) with aggregate outgoing RTGS transactions of less than 0.25 per cent of the total value of RTGS transactions, may use an agent to settle its RITS transactions, rather than settling directly across its own ESA.

The Bank's ESA policy limits the scope for material risks to arise from tiered participation arrangements. Since only ADIs individually accounting for less than 0.25 per cent of the total value of RTGS transactions may settle through an agent, no individual indirect participant would be expected to pose material risk to either its agent or the system more broadly. Further, to reduce dependence on its agent, a bank that participates indirectly is required to maintain an ESA for contingency purposes. To ensure that RITS has sufficient information about indirect participation, ESA holders that participate indirectly are required to report the value and volume of their outgoing RTGS payments to the Bank on a quarterly basis. This information is in part used to monitor compliance with the 0.25 per cent threshold.

A.6 Operating Hours

Standard settlement hours in RITS, as established by the RITS Conditions of Operation, are 7.30 am to 10.00 pm. These hours were extended in November 2013 to facilitate same-day settlement of DE payments submitted to RITS after the close of the interbank cash market.^[26] Prior to then, RITS closed at 6.30 pm Australian Eastern Standard Time and 8.30 pm during Australian Eastern Daylight Time (the first Sunday in October to the first Sunday in April); these remain the times when settlement of SWIFT and Austraclear transactions ceases.

Prior to 9.15 am, settlement is limited to RITS cash transfers, interbank Austraclear transactions, the deferred net obligations settled in the 9.00 am batch process (during the ‘9.00 am processing session’) (Figure A.4), and, prior to the 9.00 am batch process, settlement of obligations for the Mastercard batch and DE government clearings. Other payment instructions can be submitted to RITS during this time, but they are not tested for settlement until the ‘day session’ commences.

There are also restrictions on the types of payments that can settle in the evening settlement session. Only ‘evening agreed’ settlement participants, as defined in the RITS Regulations, can participate fully in the evening settlement session from 5.15 pm onwards.^[27] Consequently, to allow the settlement of remaining queued transactions at the end of the day session, there is a 45 minute settlement close session. At the end of the ‘settlement close session’ at 5.15 pm, any remaining queued payments that are not flagged as being evening eligible are removed from the queue.

Footnotes

Available at <https://www.rba.gov.au/payments-and-infrastructure/rits/>. [13]

Payments Policy Department and Payments Settlements Department are separate departments in the Bank's organisational structure, with separate reporting lines up to and including the level of Assistant Governor. [14]

For more information on the LVSS, see Box A: Developments in Retail Payments Settlement Arrangements in RBA (2013), 2013 Self-assessment of the Reserve Bank Information and Transfer System, December, pp 7–8. [15]

To ensure that a batch administrator can administer the batch in a safe and efficient manner, the Bank requires that it meets certain risk-based requirements. For more information, see <https://www.rba.gov.au/payments-and-infrastructure/rits/information-papers/eligibility-criteria-for-batch-administrator/>. [16]

Payments are only tested for ‘auto-offset’ if they have been on the queue for at least one minute. [17]

For more information on how RITS facilitates the financial settlement of property transactions originating from the PEXA system, see Section 3.2.3 in RBA (2014), 2014 Assessment of the Reserve Bank Information and Transfer System, December, p 13. [18]

This functionality can also be used to set the status of all payments above a threshold value to priority. [19]

For more information on the Bank's counterparty eligibility criteria, see <https://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-counterparties.html>. [20]

They will also support the settlement of obligations arising via the FSS in the future. [21]

The position is determined as a multiple of a participant's expected DE obligations. To limit the need for ESA holders to contract intraday repos on a regular basis, the Bank may agree to contract an amount of open repos (at the cash rate target) over and above the stipulated minimum position. This includes ESA holders that do not participate directly in the settlement of DE obligations in RITS. These maximum permitted positions in open repos are reviewed at least annually. [22]

For more information on ASX Collateral, see Box B: ASX Collateral in RBA (2013), 2013 Self-assessment of the Reserve Bank Information and Transfer System, December, p 12. [23]

The ESA Policy is available at <https://www.rba.gov.au/payments-and-infrastructure/esa/>. [24]

Under the Bank's Financial Stability Standards for Central Counterparties a CCP that the Bank determines to be systemically important in Australia and has Australian dollar obligations is required to settle its Australian dollar obligations across its own ESA or that of a related body corporate acceptable to the Bank. [25]

During Australian Eastern Standard Time, the 7.15 pm and 9.15 pm DE settlements occur after the close of the interbank cash market. However, during Australian Eastern Daylight Time, Austraclear and SWIFT transactions continue to be settled until 8.30 pm, so only the last DE settlement occurs outside normal banking hours. [26]

RITS participants do not have to be evening agreed if they only participate in DE and property settlements after 5.15 pm. [27]