Other Regulatory Responsibilities | Payments System Board Annual Report – 2008

Payments System Board Annual Report – 2008 Other Regulatory Responsibilities

Exchange Settlement Accounts

The Payments System Board has ongoing responsibility for the Bank's policy on access to Exchange Settlement (ES) accounts. These accounts provide a means for ultimate settlement of interbank obligations via the exchange of a settlement asset that carries no credit risk – a deposit held with the Reserve Bank.

Over the past decade, access to ES accounts has been liberalised. Under current policy, both Authorised Deposit-taking Institutions (ADIs) and third‑party payment providers supervised by APRA are eligible to hold ES accounts, provided the Bank is satisfied that they have the liquidity to meet settlement obligations under routine conditions, during seasonal peaks and under periods of stress. Organisations not supervised by APRA that operate in the deferred net settlement systems are typically subject to ongoing collateral requirements. ADIs that account for at least 0.25 per cent of all RTGS payments are required to settle on their own behalf. Smaller institutions may elect to settle using another ES account holder as an agent.

In 2007/08, the Bank granted ES accounts to three applicants: Fortis Bank, Standard Bank and the Industrial and Commercial Bank of China. All but the latter applied for, and were granted, permission to appoint an agent to settle payments on their behalf. Several further applications are pending. A full list of ES account holders is available on the Bank's website.

Account Switching

In February 2008, the Treasurer announced a reform package aimed at making it easier for retail customers to move their business between banks. A key element of the package is the introduction of a ‘listing and switching’ service to simplify the process of identifying existing direct debit and credit transactions (for example, payroll and bill payments) and redirecting these to the customer's new account. Currently, identifying and redirecting these payments can be a difficult and time consuming process and may limit competition by discouraging customers from moving between financial institutions.

The Australian Bankers' Association (ABA) and Abacus-Australian Mutuals (the industry association for building societies and credit unions) have committed to the introduction of this service, which is being co-ordinated through a group convened by the Australian Payments Clearing Association (APCA). The key elements of the service include the following:

upon request, a customer's old financial institution will provide a list of direct debit and credit arrangements over the previous 13 months to the customer. The list will be provided as soon as practicable and no later than five business days after the customer's request;
the new financial institution will provide the customer with information and support to help the customer make the switch. Institutions will provide customised ‘switching packs’, taking into account guidelines provided by APCA; and
if requested by the customer, the customer's new financial institution will assist in notifying billing and crediting organisations of new direct debit and direct credit arrangements.

The industry has committed to having the listing and switching service operational by 1 November 2008. APCA has provided regular progress reports to the Bank, and these have been made available on the Bank's website.^[15]

ATM Reforms

As discussed in last year's Annual Report, in mid 2007 industry participants agreed to a set of reforms to the ATM system in Australia, bringing to an end many years of industry negotiation. The agreement addresses concerns that the Board has held for some time about the difficulties new players can face when attempting to join the ATM system, and the competitive pressures within the system, particularly those applying to interchange fees. The agreement involves several elements:

the development of an objective and transparent access code by APCA, setting out the conditions that new entrants to the ATM system are required to meet, the rights of new entrants, and the requirements on current participants in dealing with new entrants;
the clear disclosure of any charges levied by the ATM owner before the customer proceeds with a withdrawal, with the customer able to cancel the transaction at no cost; and
the abolition of bilateral interchange fees paid by banks and other financial institutions to ATM owners for the provision of ATM services. With these fees abolished, ATM owners will be free to charge customers who use their ATMs but must disclose the fee, increasing the overall transparency of pricing.

Under these reforms, multilateral interchange fees in sub-networks – either those currently in existence (in the Rediteller and Cashcard networks) or those that may form in the future – would be possible. The Board has expressed the view that, if such fees exist, they should be publicly disclosed. In addition, the rules that govern access to sub-networks should be transparent and objective and not impair efficiency and competition in the payments system.

One element not covered in the agreement is the level of ‘foreign fees’ for the use of an ATM belonging to a network other than that of the card issuer. Currently the four largest banks charge fees of $2 to their customers and pay an interchange fee that averages around $1. Under the new arrangements issuing banks will no longer be paying interchange fees and the Bank sees no justification for foreign fees to remain at their current levels. Indeed, the Bank sees a strong case for foreign ATM transactions to be charged at the same rate as own ATM transactions given that the issuing costs involved will be almost identical.

Originally, the Board indicated that it hoped that the reforms would be implemented by 1 October 2008. The industry, however, subsequently set 3 March 2009 as the implementation date, citing a number of technical issues, including: the need to develop a technical specification for direct charging; the time required for the testing of bilateral links; the need to physically modify a large proportion of existing ATMs; and a shortage of resources available to make the required software changes to machines.

The ABA and APCA have been asked to provide quarterly reports to the Bank on progress with the reforms.^[16] The reports, along with the Bank's own liaison with industry players, indicate that substantial progress is being made, both on the centralised structures – such as the Access Code, the constitution of the ATM Access Company that will administer the Code, and amendments to the relevant clearing system rules – and on implementation at the individual institution or provider level. Nonetheless considerable work remains to be done, including how best to give regulatory certainty to the new arrangements.

One issue that has arisen is that the adoption of a single implementation date, rather than a progressive roll-out, will leave some machines without full direct charging functionality during a transition period. For around 2,500 ATMs, direct charging software cannot be turned on remotely and they will have to be converted progressively as technicians visit them. For a period (probably around 3 months), these machines will meet the disclosure requirements by the use of external signage and the direct charge will be effected by the host systems, rather than the ATM.

Another issue that has arisen in recent months has been the circumstances in which smaller financial institutions are able to have bilateral bespoke arrangements with larger networks for fee-free ATM access for their customers. Smaller institutions, which typically have no (or very few) ATMs, feel that without the ability to negotiate such arrangements, they will be unable to provide banking services on a basis that is competitive with larger institutions.

The Board recognises that there is a case for the continuation of these bespoke agreements provided they meet certain conditions. In a letter to APCA on 1 September 2008, the Bank clarified that an indirect connector is able to negotiate a bespoke agreement with another participant provided that:

the agreement is one-way only – that is, it provides the customers of one institution with access to ATMs operated by a second institution, but not the other way around;
an institution accessing another institution's ATMs in this way only has one such arrangement; and
any such bespoke agreements be reported to the Bank.

Oversight of Continuous Linked Settlement (CLS) Bank

CLS Bank was developed to provide a mechanism for settling foreign exchange transactions on a payment‑versus‑payment basis, thereby eliminating foreign exchange settlement risk. This risk arises when settlement of foreign exchange transactions occurs across different payment systems in different time zones, with the party settling its obligation first exposed to the risk that its counterparty fails to settle its obligation in the other currency. CLS eliminates this risk by settling both legs of a foreign exchange transaction simultaneously.

CLS is chartered in the United States and is, therefore, regulated and supervised by the Federal Reserve System. The operations of CLS are, however, also overseen by a group of central banks currently under the auspices of the Committee for Payment and Settlement Systems Subgroup on Foreign Exchange Settlement Risk (FXSR subgroup). The Reserve Bank is a member of this joint oversight group. Over the past year, there has been considerable work in formalising a new oversight group and the processes that group will use for overseeing CLS. When introduced, the new arrangements will involve an oversight committee separate from the FXSR subgroup. As CLS settles foreign exchange transactions involving the Australian dollar, the Bank will be represented on this new oversight committee.

During 2007/08, CLS Bank expanded its operations to settle one‑sided payments, including non‑deliverable forwards, foreign exchange option premiums and credit derivatives. The Bank, along with some other central banks, expressed reservations about this expansion beyond CLS's core foreign exchange business, as it could lead to a further concentration of payments late in the day, increasing operational and other risks. The Bank has therefore indicated to CLS that if the value of non-payment-versus-payment activity that it settles through its account at the Reserve Bank increases above 0.25 per cent of the value of RTGS transactions, the Bank would review CLS's ES account arrangements. Presently this threshold does not impose any practical constraint as the facility has yet to be used for Australian dollar products.

In parallel with these developments, CLS has expanded the range of currencies accepted for payment-versus-payment settlement to include the Israeli shekel and the Mexican peso.

Footnotes

These reports are available at: <http://www.rba.gov.au/payments-system/reforms/asi/>. [15]

These reports are available at: <http://www.rba.gov.au/payments-and-infrastructure/atms/industry-reports.html> [16]