APPLICATION FOR AN EXCHANGE SETTLEMENT ACCOUNT

1.

Institutions which provide, or plan to provide, payment services to third parties may apply for an Exchange Settlement (ES) Account at the Reserve Bank for the settlement of their clearing obligations to other providers. In general, applicants must be current or prospective members of a payments clearing arrangement or operate a clearing house which acts as a central counterparty.

2.

Applicants for an ES Account must demonstrate that their financial resources and skills are consistent with their actual and anticipated payments business and the resulting settlement obligations. Applicants must submit a business plan, balance sheet and projected financial statements, for the first three years of operation. The business plan should show, in each of the relevant payments clearing arrangements:

• expected gross daily payment flows, both routinely and during predictable "peak" periods;
• expected net settlement obligations, both routinely and during predictable "peak" periods;
• sources of ES liquidity to settle routine and predictable "peak" payment obligations; and
• sources of liquidity (and its terms) available to settle payment obligations in times of unpredictable pressures.

3.	Applicants wishing to operate their ES Accounts in deferred net settlement systems must show:

• that their ES liquidity will be adequate to meet their anticipated routine and "peak" period settlement obligations;
• that any collateral or guarantees to be relied upon, especially in times of unpredictable stress, are adequate to meet their obligations. They will also have to explain how they propose to convert these to ES funds in a timely fashion; and
• whether there are any loss-sharing arrangements under which other members of the clearing stream assume the settlement obligations of the applicant if it cannot meet them. The terms of any such arrangements must be clearly set out. (In any loss-sharing arrangement, the applicant may also incur settlement obligations as a result of the failure of another member. Where relevant, the applicant must identify these potential obligations and how they would be met.)

4.	Applicants wishing to operate their ES Accounts on a real-time gross settlement (RTGS) basis must demonstrate that they have:

• the operational capacity to conduct RTGS transactions, including to deliver payments to the RTGS queue (through RITS, Austraclear, SWIFT or another feeder system that is approved for connection to RITS) and to manage transactions on the queue; and
• access to adequate intraday ES liquidity to allow them to conduct their customers' business in a way that does not unreasonably impinge on other participants or reduce the efficiency of the system.

5.	Institutions which are supervised by the Australian Prudential Regulation Authority (APRA), and which can satisfy the Bank that they have the capacity to meet their settlement obligations, are eligible for an ES Account without special conditions. However, the Bank may impose collateral requirements on a transitional basis for institutions with only limited payments experience.
6.	Organisations not supervised by APRA which operate in deferred net settlement systems will need to meet collateral requirements on an ongoing basis, except where they are always net receivers in payments clearing arrangements. Collateral requirements will not apply to organisations which operate in the RTGS system.
7.	Collateral requirements will be set in relation to an institution's maximum expected net settlement obligations. Collateral comprises Commonwealth Government Securities and Australian dollar securities issued by the central borrowing authorities of State and Territory governments. The Bank may require an ES Account holder to provide regular information on its payments system activities so that the adequacy of any collateral can be monitored.
8.	ES Accounts must be maintained in credit at all times. The Bank may revoke an ES Account if a holder is unable, or likely to become unable, to meet this requirement or is unable to meet collateral or any other conditions imposed on the operation of the account. Importantly, the Bank does not guarantee that an ES Account holder will be able to meet its settlement obligations.
9.	ES Accounts are operated through the Reserve Bank Information and Transfer System (RITS). All applicants for an ES Account must join RITS and meet all of its operating conditions and charges. Details of these requirements will be provided to applicants.
10.	Applications for an Exchange Settlement (ES) Account should be addressed to:

Head of Payments Policy
Reserve Bank of Australia
GPO Box 3947
SYDNEY NSW 2001
Telephone: (02) 9551 8700

Prospective applicants are strongly encouraged to contact the Bank at an early stage to discuss their interest in obtaining an ES Account. This will allow matters relevant to the application to be identified at an early stage.

Reserve Bank of Australia
1 March 1999