Exchange Settlement Account Policy

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process. This page outlines the Reserve Bank's policy on ESA eligibility; and provides additional information on management of an ESA and the application process.

Eligibility for an Exchange Settlement Account

ESAs are used for the settlement of obligations from the clearing process. An applicant for an ESA must be:

  • an authorised deposit-taking (ADI) or other institution that is an actual or prospective provider of third-party (customer) payment services with a need to settle clearing obligations with other providers; or
  • an Australian-licensed central counterparty (CCP) or securities settlement facility (SSF) (or a related body corporate acceptable to the Reserve Bank) with payment arrangements that require Australian dollar settlement.[1]

ESAs must be used for settlement of Australian dollar obligations by the following types of institution:

  • all banks and other ADIs with aggregate wholesale RITS real-time gross settlement (RTGS) transactions (i.e. Austraclear and SWIFT PDS transactions and RITS cash transfers) that constitute 0.25 per cent or more of the total value of wholesale RITS RTGS transactions; and
  • any Australian-licensed CCP that the Reserve Bank determines to be systemically important in Australia must settle Australian dollar margin-related receipts or payments, and the CCP's Australian dollar securities- or derivatives-related obligations, across an ESA held in its own name, or that of a related body corporate[2] acceptable to the Reserve Bank.[3] If the Reserve Bank determines that a CCP has become systemically important subsequent to being granted a CS facility licence, the CCP would be expected to present the Reserve Bank with a plan and timetable for meeting its requirements under this policy within six months of the determination.

Management and Use of an Exchange Settlement Account

Use of an agent

An ADI with wholesale RITS RTGS payments that constitute at least 0.25 per cent of the total value of wholesale RITS RTGS payments must settle its high-value transactions in real time across its own ESA.[4]

Any ESA holder that is not a CCP, with aggregate wholesale RITS RTGS transactions that constitute less than 0.25 per cent of the total value of wholesale RITS RTGS transactions, may execute its RTGS transactions using an agent, rather than directly across its own ESA.[5] A bank that elects to settle its RTGS transactions using an agent must, however, continue to maintain an ESA for use in a contingency.

Any ADI intending to act as an agent for RTGS payments for the first time will need to seek prior approval (in the form of a non-objection) from the Australian Prudential Regulation Authority (APRA). In addition, any ADI that intends to cease using an agent for some or all of its wholesale RITS RTGS transactions, and to settle these transactions in real time across its own ESA, must also seek approval (in the form of a non-objection) from APRA.

Any ESA holder that uses an agent for executing its RTGS payments will be required to provide regular reporting of payment flows to the Reserve Bank.

Special conditions

An ADI supervised by APRA, and that can satisfy the Reserve Bank that it has the capacity to meet its settlement obligations, may generally operate its ESA without special conditions. Other institutions may be approved by the Reserve Bank to operate an ESA for specified purposes. The Reserve Bank may impose operational or other requirements on ESA holders at its discretion.

An institution that is not supervised by APRA, or that has limited access to liquid assets, and that operates in deferred net settlement systems or that has time critical payment arrangements may need to meet liquidity requirements on an ongoing basis. Liquidity requirements will generally not apply to an institution that is not supervised by APRA and that either only makes RTGS payments, or is always a net receiver in payments clearing arrangements.

Where they apply, liquidity requirements will generally be set in relation to an institution's maximum expected net settlement obligations. Liquidity requirements may be met by overnight ESA balances or securities such as those eligible for repurchase agreements at the Reserve Bank open market operations, and other assets determined by the Reserve Bank at its discretion. The Reserve Bank may require an ESA holder to provide regular information on its payments system activities to assist in monitoring the adequacy of any ESA balances or collateral.

Operational and other requirements

ESAs are operated through the Reserve Bank Information and Transfer System (RITS). All applicants for an ESA must join RITS and meet all of its operating conditions and charges. Details of these requirements will be provided to applicants.

For any institution settling transactions across its own ESA, responsibility for the account rests with management located in Australia. Such institutions must also maintain sufficient resources in Australia to ensure that the institution is always able to authorise, execute and settle RTGS transactions in an efficient and timely way.

A CCP or SSF (or related body corporate) applying for an ESA must satisfy the general eligibility criteria for ESA holders set out above, including membership of RITS. If an ESA is granted, the CCP or SSF will be subject to operational and other requirements placed on ESA holders by the Reserve Bank.

An ESA must be maintained in credit at all times. The Reserve Bank may revoke an ESA if a holder is unable, or likely to become unable, to meet this condition or any other requirements on the account. Importantly, the Reserve Bank does not guarantee that an ESA holder will be able to meet its settlement obligations.

Application for an Exchange Settlement Account

An institution that meets the eligibility criteria described above may apply for an ESA at the Reserve Bank for the settlement of its clearing obligations. Prospective applicants are strongly encouraged to contact the Reserve Bank at an early stage to discuss their interest in obtaining an ESA. This will allow matters relevant to the application to be identified at an early stage.

In applying for an ESA, an applicant must demonstrate the following:

  1. An applicant for an ESA must demonstrate that it has financial resources and skills consistent with its actual and anticipated payments business and the resulting settlement obligations. An applicant 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 liquidity to settle routine and predictable 'peak' payment obligations
    • sources of liquidity (and its terms) available to settle payment obligations in times of unpredictable pressures.
  2. An applicant that will be operating its ESA must demonstrate:
    • the operational capacity to operate and manage its ESA
    • that its ES liquidity will be adequate to meet its anticipated routine and ‘peak’ period settlement obligations (for participation in deferred net settlement and other time critical payment arrangements)
    • access to adequate intraday ES liquidity to allow it to conduct its customers' business in a way that does not unreasonably impinge on other participants or reduce the efficiency of the system (for RTGS payments)
    • that any collateral or guarantees to be relied upon, especially in times of unpredictable stress, are adequate to meet its obligations. The applicant will also have to explain how it proposes to convert these to ES funds in a timely fashion
    • 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.)
  3. Prospective applicants should contact the Reserve Bank (rits@rba.gov.au or 1800 659 360) for information on the operational and legal requirements of the Reserve Bank.
  4. Applications for an ESA should be addressed to:
    Head of Payments Policy Department
    Reserve Bank of Australia
    GPO Box 3947
    SYDNEY NSW 2001
    AUSTRALIA

Endnotes

An Australian-licensed CCP or SSF is a CCP or SSF licensed under s824 of the Corporations Act 2001. This includes overseas-based CCPs granted a licence under section 824B(2). [1]

Please see definition of ‘related body corporate’ in section 9 of the Corporations Act 2001. [2]

Factors that the Reserve Bank will take into account in determining the systemic importance of a CCP would ordinarily include: the size of the facility in Australia (for example, the value of transactions processed by the facility in Australian dollar-denominated products, or its market share; or the total amount of initial margin held in respect of Australian dollar-denominated products); the availability of substitutes for the facility's services in Australia; the nature and complexity of the products cleared or settled by the facility; and the degree of interconnectedness with other parts of the Australian financial system. [3]

At least initially, settlements through the Fast Settlement Service will not be included in the calculation of the 0.25 per cent threshold. The Bank will keep this position under review. [4]

Detailed operational and legal arrangements apply to ESA holders that execute their RTGS transactions through an agent. [5]