RDP 2012-06: The Impact of Payment System Design on Tiering Incentives 3. Australia's RTGS System

RITS has operated as an RTGS system since 1998.^[4] The central queue in RITS operates on a ‘bypass first-in first-out (FIFO) basis’.^[5] If the transaction being tested for settlement cannot be settled individually, the bilateral-offset algorithm searches for up to 10 offsetting transactions (adding them based on the order of submission), which it attempts to settle simultaneously.^[6] RITS incorporates other queue management features, which allow participants to manage their payments and reserve liquidity for ‘priority’ payments. To assist in this process, RITS participants have access to real-time information, including their settled and queued payments and receipts. The liquidity-reservation feature in RITS allows participants to set a ‘sub-limit’, where balances below this limit are reserved for the settlement of payments flagged as having ‘priority’ status. Payments flagged as having ‘active’ status are tested for settlement against balances in excess of the sub-limit, while payments flagged as ‘deferred’ are not tested for settlement until the sending participant changes the status of the payment to either active or priority. Participants can amend the status of payments at any time prior to settlement.

Connection to RITS occurs via either the internet, infrastructure shared with the Australian debt securities depository and settlement system, Austraclear, or the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The RBA does not charge for internet connections to RITS. Thus, non-liquidity costs of direct participation are those associated with equipment, office space, staff training and salaries, internet service provision, Austraclear and SWIFT. In general, these costs are likely to vary considerably across institutions and are difficult to estimate accurately.

Initially, direct access to RITS was only available to banks, and all banks were required to settle their RTGS payments using their own settlement account at the RBA.^[7] In 1999, following the recommendations of the Wallis Inquiry into Australia's financial system, access was broadened to allow third-party payment providers and non-bank authorised deposit-taking institutions (ADIs) to hold a settlement account with the RBA to allow them to participate directly in RITS.^[8] The Wallis Inquiry also led to the creation of the Australian Prudential Regulation Authority (APRA), which regulates all ADIs – banks, building societies, credit unions and special third-party providers of payments services. While all ADIs can now become direct participants in RITS, only banks are required to hold a RITS settlement account.

Notwithstanding the broad scope of participation, payments through RITS are highly concentrated, with the major domestic banks accounting for almost 60 per cent of the value of all payments made.^[9] Indeed, payments just between the four major domestic banks account for around a third of all payments. Also, the direction of payment flows tends to be skewed. For example, most RITS participants make more than half of their payments, by value, to just a few other participants.