2017 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 activity and participation in RITS and the operational performance of RITS over the assessment period, and describes the operational arrangements and key design features of RITS. Material changes to RITS since the previous assessment are discussed in section 3 of this report.

A.1 Activity and Participation

Over 70 per cent of the value of non-cash payments in Australia is settled on an RTGS basis in RITS (Table A.1). RITS is also used to settle time-critical payments to other FMIs: Australian dollar pay-ins to CLS Bank International (CLS); margin payments to central counterparties (CCPs); and debt and equity settlement obligations in securities settlement systems. Furthermore, RITS is integral to the functioning of other payment systems, with the interbank obligations arising from non-cash retail payments also settled in RITS.

In the 12 months to March 2017, RITS settled over $174 billion on average each day, which is around 5 per cent higher than the average daily value settled in the previous twelve months (Graph A.1). The number of transactions also increased over the same period; in the 12 months to March, the average number of RTGS transactions settled each day increased by around 1½ per cent to around 45,600. The peak number of transactions settled on single day during the assessment period was around 88,700 transactions, while the peak daily value was $258 billion.

While RITS is primarily an RTGS system, it also facilitates the net settlement of interbank obligations arising from the equity market (through CHESS, the equities settlement system operated by ASX Settlement), retail payment systems and the property settlement system (see section A.5 for more information on these systems). Equity and property settlement payments are settled as batch payments. The majority of the value of retail payments settled in RITS is from the direct entry (DE) system.

Since late 2014, RITS has been used to support Property Exchange Australia Ltd's (PEXA's) national electronic conveyancing system. PEXA can submit for settlement within RITS linked property transactions as individual multilateral net batches.^[9] While they remain a small proportion of overall activity within RITS, the number and value of property batches settling in RITS has continued to grow rapidly (Graph A.2).

Under the Bank's ESA access policy, ADIs that account for over 0.25 per cent of the total value of RTGS transactions and systemically important CCPs are required to settle their Australian dollar obligations in RITS using their own ESAs (see section A.9 for further details on access and participation in RITS). An ADI with a share of transactions of less than 0.25 per cent of the total value of RTGS transactions is permitted to use an agent to settle its transactions; however, they are required to hold a dormant ESA for contingency purposes. As at the end of March, 35 ADIs held dormant ESAs (Table A.2). The value of outgoing RTGS payments settled by these participants, nevertheless, has remained very low, at below 1 per cent of total RTGS payments over the assessment period. Activity in RITS remained highly concentrated among the major domestic banks and foreign banks, both in terms of number and value of RTGS payments.

During the current assessment period, two foreign banks, which had previously maintained dormant ESAs, became transacting members, while two other foreign banks resigned their membership. There were also 10 new dormant ESAs created, while three dormant ESA holders resigned their membership.

Since RITS is an RTGS system, participants need access to substantial liquidity in order to settle payments individually. Liquidity can be sourced from participants' opening ESA balances and additional funds made available to participants by the Bank via its intraday liquidity facility (see section A.7 for details). The aggregate of opening ESA balances is primarily determined by the Bank's open market operations (OMOs) and liquidity provided under open repos. Open repos were introduced in November 2013 to facilitate the settlement of same-day DE payments, as evening settlement obligations arising from the DE system are unknown before the close of the interbank cash market. Average liquidity increased sharply following the introduction of open repos, and has continued to increase in recent quarters (Graph A.3, top panel).

System liquidity plays a role in the timely settlement of RTGS transactions. In general, settling payments earlier in the day is desirable as it limits the potential adverse consequences if a participant or RITS were to experience an operational issue late in the day. The ratio of system liquidity to the value of payments settled had been slowly increasing since around 2007, and then doubled following the introduction of open repo (Graph A.3, bottom panel). This is one factor that has contributed to the earlier settlement of payments in RITS. The average time of day when half of payments, by value, have settled has moved progressively earlier; from between 2.00 pm and 3.00 pm in the mid 2000s, to between around 12.00 pm and 1.00 pm in recent years (Graph A.4).

A.2 RITS Availability

RITS availability

The key operational target is for RITS to be available to its participants in excess of 99.95 per cent of the time. Availability is measured relative to the total number of hours that the system is open for settlement and reporting. In 2016, RITS met its availability target, with Bank-operated systems recording average availability of 99.99 per cent (Table A.3).

RITS also has capacity targets. These include a:

processing throughput target, which aims to ensure that RITS is able to process the peak-day transactions in less than two hours (assuming no liquidity constraints)
projected capacity target, which specifies that RITS should be able to accommodate projected volumes 18 months in advance with 20 per cent headroom.

RITS is regularly tested against these targets and continues to meet them.

External system availability and other dependencies

The Bank maintains service level agreements with SWIFT and Austraclear which set out the availability targets, as well as expected response times and level of support should an issue arise. In 2016, the combined availability of the Austraclear system and SWIFT services was 99.98 per cent (see Table A.3, above). RITS also has critical dependencies on utility providers. To manage these dependencies, both the main and backup sites have an uninterruptable power supply and a backup power generator system. All external communications links to data centres are via dual, geographically separated links.

The efficient operation of RITS is also dependent on the operational reliability and resilience of its members. An operational disruption at a member could prevent it from sending payment instructions to RITS. This could in turn cause liquidity to accumulate in that member's ESA, forming what is known as a ‘liquidity sink’, and preventing liquidity from being recycled through the system efficiently. Recognising this interdependency, the Bank published Business Continuity Standards for direct participants in RITS in May 2013. These standards aim to promote high availability in RITS's payments processing operations, requiring both resilience of system components and rapid recovery if failover to alternative systems is required.^[10]

The Bank monitors compliance with the Business Continuity Standards on an ongoing basis. Each member that directly participates in RITS is required to submit a self-certification statement against the standards annually. As at the end of 2016, 59 of 60 RITS direct participants were compliant with the standards.

A.3 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.^[11] 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 members, 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 Payments System Board has ultimate responsibility.^[12] The Executive Committee has established an internal FMI Review 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.4 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 the pair of members and attempts to settle these simultaneously.^[13] Members 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 members have access to a range of real-time information to enable them to manage their liquidity efficiently and effectively. In particular, RITS members 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 members to efficiently manage and conserve liquidity. Members can use ‘sub-limits’, which they can change at any time during the settlement day, to reserve liquidity for priority payments. There are three payment statuses available to members, which determine how individual transactions draw on liquidity:

Priority payments are tested against the full ESA balance less funds reserved for property settlement.
Active payment instructions are settled as long as the paying institution has sufficient funds in their ESA above the sum of the member's specified sub-limit and any property settlement reservations.
Payments with a deferred status are not tested for settlement until their status is amended.

This functionality can be accessed through either the RITS User Interface or via SWIFT messages. Members 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, above and below a member set threshold.^[14]

A.5 Systems Linked to RITS

RTGS payment instructions can be submitted to RITS directly as RITS cash transfers, or through two feeder systems: SWIFT Payment Delivery System (PDS) and Austraclear. The SWIFT PDS is a closed user group administered by the Australian Payments Network, which sets rules and procedures for clearing payments in Australia through its High Value Clearing System (HVCS).^[15] The SWIFT PDS is used primarily to make 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.^[16] 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) 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.4). The settlement of obligations arising in the retail payment systems administered by the Australian Payments Network is facilitated by the Bank's Low Value Settlement Service (LVSS) in RITS.^[17] All other multilateral net batches are administered by ‘batch administrators’ and entered into RITS through its batch feeder functionality.^[18]

A.6 Operating Hours

Standard settlement hours in RITS, as established by the RITS Regulations, are 7.30 am to 10.00 pm.^[19] Settlement of SWIFT and Austraclear transactions cease 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).

Prior to 9.15 am, settlement is limited to the deferred net obligations settled in the 9am settlement process (during the 9am processing session) (Figure A.3), and, prior to the 9.00 am settlement process, settlement of RITS cash transfers, interbank Austraclear transactions, 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 daily settlement session commences at 9.15 am.

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.^[20] 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.

A.7 Liquidity Provision

To facilitate the settlement of payments in RITS, the Bank provides liquidity to members at low cost via its Standing Facilities. Under these facilities, a member can enter into a repo with the Bank; a repo transfers outright title of eligible securities to the Bank (upon purchase of securities) in return for a credit to the member's ESA, with an agreement to reverse the transaction at some point in the future. Standing facilities are available to any RITS member which is ‘approved’ by the Bank's Domestic Markets department and settles its payments across its own ESA (for more information on eligibility criteria for OMOs and Standing Facilities see section A.9).

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 fee), but must be reversed before the settlement of Austraclear transactions ceases in RITS.
Overnight repos. In the exceptional case that a member 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 member retains the liquidity for use on future days. Open repos help members 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, the size of which are unknown prior to the close of the interbank cash market and Austraclear.^[21] For members that settle DE obligations across their own ESA, the Bank determines a minimum position in open repos that the member should maintain.^[22] To the extent that these members 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 members to remain active in the interbank cash market while it is open, ESA funds surplus to the ESA holder's open repo position (subject to the DE allowance) earn a rate 25 basis points below the cash rate target, while any shortfall in funds incurs a 25 basis point charge.

Members can also source liquidity through term repos and some outright transactions conducted in the Bank's OMOs. 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.

A.8 Credit Risk and Collateral

The Bank is not exposed to any financial risks from the settlement of payments in RITS. The Bank does, however, incur credit risk through the provision of liquidity to members through OMOs and Standing Facilities to support payments and settlement activity (for more information on OMOs and Standing Facilities see section A.7). It manages this credit risk by lending funds via purchase of securities under repo. Consequently, the Bank would only face a loss if a RITS member failed to repurchase securities sold under repo and the market value of the securities fell to less than the agreed repurchase amount. To manage this risk, the Bank purchases under repo only highly rated debt securities denominated in Australian dollars and lodged in Austraclear. All securities purchased under repo are conservatively valued, and subject to haircuts and daily margin maintenance.

To enter into a repo with the Bank, an entity must meet eligibility criteria. Counterparties must be: a RITS member and an Austraclear member (and the legal entity holding the Austraclear account must be identical to the legal entity that is a participant in RITS); subject to ‘appropriate regulation’ (for example, an entity regulated by the Australian Prudential Regulation Authority (APRA), or a clearing and settlement facility overseen by the Bank); and able to ensure efficient and timely settlement of transactions within Austraclear. To access the Bank's Standing Facilities, an approved counterparty must also settle its payments across its own ESA.^[23]

A.9 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 RITS members and so meet 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 eligibility 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 member 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 member's expected payments business in RITS. To reduce the operational burden on smaller RITS members, banks 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 member would be expected to pose material risk to either its agent or the system more broadly. Further, to reduce dependence on its agent, a member 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.10 New Payments Platform

The NPP, scheduled to go live in late 2017, aims to enhance Australia's retail payments system by providing a platform that allows households, businesses and government entities to:

make real-time retail payments
make and receive low-value payments outside normal banking hours
send more complete remittance information with payments
address payments in a relatively simple way.^[26]

The design and development of the NPP is steered by NPP Australia Limited, an industry mutual company consisting of 12 ADIs and the Bank. In December 2015 NPP Australia Limited signed a 12-year contract with SWIFT to design, build and operate the Basic Infrastructure. This is the central utility that will connect participating financial institutions and other approved entities, allowing payment and settlement messages to flow between members.

The Basic Infrastructure will be capable of supporting various tailored commercial payment services, known as overlay services, which participants can choose to make available to their customers. BPAY was appointed to develop the first overlay service to use the NPP. This service will enable participants to offer their customers person-to-person mobile payments with funds available almost immediately to the recipient even if the two parties are not customers of the same institution. Over time, other overlay services are expected to be developed to facilitate a variety of payment types.

Fast Settlement Service

To facilitate the final and irrevocable settlement of payments processed by the NPP, the Bank is designing and building the Fast Settlement Service (FSS), which will operate 24 hours a day, 7 days a week. The FSS will be a RITS service, owned and operated by the Bank. As a RITS service, the FSS is being designed to meet standards in relation to availability, capacity and security that are equivalent to those of the core RITS service. Direct users of the FSS will be RITS members and bound by the RITS Regulations. Once the FSS is launched, it is Payment Policy Department's intention that, to the extent that the FSS provides critical services, it would be assessed against the Principles as part of the assessment of RITS.

The purpose of the FSS is to settle retail payments in real time and it will therefore need to be able to settle a high volume of low-value payments within seconds of their initiation.

Although the FSS will use some of the existing RITS infrastructure, the systems will operate on separate platforms so that RITS's core settlement service and the FSS will be able to process and settle payments independently of one another. Each RITS member will continue to have only one ESA; however, members will divide their ESA balances between an ‘FSS balance’ and a ‘RITS balance’. FSS payments will only be tested for settlement against the FSS balance, and payments sent to RITS's core settlement service will only be tested for settlement against the RITS balance. FSS payments will be settled individually on a gross basis. Payments will be tested for settlement on a settle-or-reject basis; if a participant did not have enough funds in its FSS balance the payment would be rejected, and the participant would need to resubmit the payment later if it wanted the payment to be settled.

During the operating hours of RITS's core settlement service, members will manage the distribution of their ESA balances between their FSS and RITS balances (see section A.6 for details of RITS operating hours). Members will have tools to help manage their balances. For example, there will be functionality allowing members to set up automatic transfers between the balances if funds in the FSS balance fall below a threshold set by the member. Outside the operating hours of RITS's core settlement service, overnight and on weekends for example, it is expected that an ESA holder's entire ESA balance will be available for FSS settlements. Excess funds will be returned to RITS's core settlement service automatically when it reopens.

Footnotes

For more information on property settlement functionality in RITS see section 3.2.3 in RBA (2014), 2014 Assessment of the Reserve Bank Information and Transfer System, p 13. Available at https://www.rba.gov.au/payments-and-infrastructure/rits/self-assessments/2014/. [9]

For more information on the participant Business Continuity Standards, see Box E: Participant Business Continuity Standards in RBA (2013), 2013 Self-assessment of the Reserve Bank Information and Transfer System, p 27 https://www.rba.gov.au/payments-and-infrastructure/rits/self-assessments/2013/. [10]

Available at https://www.rba.gov.au/payments-and-infrastructure/rits/about.html. [11]

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. [12]

Payments will only trigger ‘auto-offset testing’ if they have been on the queue for at least one minute. [13]

For example, a member may wish all small SWIFT transactions to be given an ESA Status of priority to allow them to settle quickly out of the priority tranche of ES funds; transactions above the member-set threshold could be given a status of active to allow manual liquidity management for these transactions. [14]

APCA became Australian Payments Network Ltd on 13 April 2017. [15]

That is, the cash leg of the transaction is settled on a gross basis simultaneously with the transfer of the security [16]

For more information on the LVSS, see Box A: Developments in Retail Payments Settlement Arrangements, in the 2013 Self-Assessment of the Reserve Bank Information and Transfer System. [17]

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/. [18]

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. [19]

RITS members do not have to be evening agreed if they only participate in DE and property settlements after 5.15 pm. [20]

They will also support the settlement of obligations arising via the FSS in the future (refer to section A.10). [21]

The position is determined as a multiple of a member'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 the Bank's counterparty eligibility criteria, see https://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-counterparties.html. [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]

These were identified as objectives in the Board's Strategic Review of Innovation in the Payments System in 2012. RBA (2012), Strategic Review of Innovation in the Payments System: Conclusions, June, available at https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/regulatory-reviews/strategic-review-of-innovation-in-the-payments-system/conclusions/. [26]