2009 Self-assessment of the Reserve Bank Information and Transfer System Assessment against the Core Principles
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1. Legal Basis
Core Principle I: The system should have a well founded legal basis under all relevant jurisdictions.
1.1 Assessment of compliance
RITS complies with this principle. The RITS rules, together with Australian legislation, provide a comprehensive and well-established framework for RTGS payments.
1.2 Legal framework
The RITS Regulations and Conditions of Operation (RITS Regulations) provide the legal structure for RITS. The RITS Regulations set out rules for the operation of RITS and the rights and obligations of participants and the Reserve Bank. The legal basis of RITS is established by contract. Standard agreements are executed to bind each party to the RITS Regulations. The RITS Regulations explicitly submit each party to the non-exclusive jurisdiction of the courts of New South Wales and their courts of appeal.
RITS accepts payment transfer instructions from approved feeder systems, including ‘batch feeder’ settlements submitted by an approved batch administrator. Admission as a feeder system is by specific reference in the RITS Regulations and contractual arrangement with the Reserve Bank.
1.3 Legal certainty of finality of settlement
Finality of settlement in RITS is made legally certain by Reserve Bank approval of RITS under Part 2, Section 9 of the PSNA. The PSNA provides for the Reserve Bank to approve an RTGS system so that transactions in that system are protected from the potential application of the zero-hour rule. Under this rule, a court-ordered liquidation is deemed to commence from the midnight before the court order was granted, which could result in payments made in the RTGS system by a failed institution on the day of insolvency being declared invalid. This would undermine the irrevocable nature of RTGS payments and create severe liquidity, and potentially systemic, problems in the payments system.
Fallback arrangements, in the event that RITS is unavailable and a decision has been made that it is unlikely to recover, provide for multilateral netting of payments received from the HVCS and Austraclear feeder systems. The legal certainty of this multilateral netting, and therefore irrevocability of finality of settlement, is protected by an approval under Part 3, Section 12 of the PSNA.
2. Understanding Financial Risks
Core Principle II: The system's rules and procedures should enable participants to have a clear understanding of the system's impact on each of the financial risks they incur through participation.
2.1 Assessment of compliance
RITS complies with this principle. The RITS rules and procedures are clear, comprehensive and up to date. As RITS is an RTGS system, RITS participants are not subject to credit risk as part of the settlement process. The liquidity risks that arise from participation in RITS and the methods available to participants to manage these risks are clearly evident from the RITS rules and procedures.
2.2 RITS rules and procedures
The RITS rules and procedures encompass the RITS Regulations and associated agreements, and a range of supporting documentation provided online through the RITS Information Facility. In particular, detailed User Guides are available via the RITS Information Facility. Details are updated as changes occur. When changes are made to the RITS Regulations, the Reserve Bank circulates the updated version to all members. Members are generally notified of other changes by email or through RITS.
The rules and procedures set out the legal basis of RITS, identify the obligations and rights of the participants and the system operator, and describe how the system operates. In explaining the system design, the operating and settlement process timetable, the arrangements for liquidity provision and the procedures for managing liquidity risks, the rules and procedures provide participants with a clear understanding of the financial risks they incur through participation.
The Reserve Bank provides participant training and monitors the performance of participants to ensure the rules and procedures are well understood. Training is provided to all new RITS members, and refresher training is offered to all members at regular intervals. Training consists of presentations by the Reserve Bank on the key features of RITS and the opportunity to perform transactions in a test environment. The Reserve Bank also tracks the daily payments of participants against their regular patterns of payments to identify and proactively deal with potential issues.
3. Management of Financial Risks
Core Principle III: The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.
3.1 Assessment of compliance
RITS complies with this principle. Since it is an RTGS system, RITS participants are not exposed to unintended credit risk in its operations: since customer accounts are not updated before interbank settlement is completed (with finality), there is no opportunity for a build-up of credit exposures between participants. The Reserve Bank's exposure to participants from providing liquidity is managed by taking title to eligible securities under repos.
RITS participants incur liquidity risks which they manage through the use of repos and various liquidity-saving tools available in RITS. Participants' liquidity management responsibilities and the alternative tools available to meet them are set out clearly in the Overview of Functionality, available from the RITS Information Facility. The Reserve Bank monitors participants' liquidity management in RITS, and liaises with participants where necessary to improve performance or prevent potential problems arising.
3.2 Credit exposures between participants
The RTGS mode of settlement in RITS is designed to ensure that unintended credit exposures do not accumulate between participants during the settlement process: payment messages are exchanged between banks simultaneously with transfer of funds across ESAs. By contrast, under the deferred net mode of settlement such exposures can arise, since banks typically update customers' accounts in respect of payment messages exchanged prior to the completion of interbank settlement. The longer the delay between the update of customer accounts and the transfer of the agreed settlement asset (ESA balances) between banks, the longer the duration of interbank credit exposure, and the greater the potential for large exposures to build up.
3.3 Credit exposure between the Reserve Bank and participants
The Reserve Bank, as the operator of RITS, provides the means of settlement and additional liquidity to participants in the RTGS system. In doing so, the Reserve Bank has the potential to incur credit exposures to participants. These are managed by requiring payments to be settled using funds in participants' ESAs, which cannot be overdrawn, and by providing liquidity to participants through repos.
To promote the efficient flow of liquidity within the system and minimise the potential for gridlock to arise, the Reserve Bank provides additional liquidity to participants via interest-free intraday repos. In unusual circumstances where a participant is unable to reverse an intraday repo with the Reserve Bank by the end of the day, the transaction can be converted to an overnight repo, with interest charged at 25 basis points above the target cash rate. The Reserve Bank only accepts highly rated debt securities denominated in Australian dollars as securities for repo. Eligible securities include those issued by: the Australian Government; the central borrowing authorities of the state and territory governments; certain supranational organisations, foreign governments and government agencies with an explicit government guarantee; and some ADIs with an ESA. More recently, some asset-backed securities and other highly-rated private securities have also become eligible for repo. Participants can only repo securities issued by a related party if they are asset-backed securities issued by a bankruptcy-remote special-purpose vehicle. To manage market risk, the Reserve Bank applies haircuts of between 2 and 10 per cent to all securities under repo, depending on the quality of the security. In the event of a very large price movement, the Reserve Bank requires additional securities to be provided as overcover. A full description of this facility and eligible securities is provided on the Reserve Bank website.
In the event of insolvency, the close-out netting provisions included in the repo agreements allow the Reserve Bank to close out or terminate the second leg of the repo immediately. This right is protected by Part 4 of the PSNA. Since a participant must use securities issued by a third party, both the participant and the issuer would have to fail for the Reserve Bank to be in a total loss situation.
3.4 Participants' liquidity risk
Reserve Bank's responsibilities
As discussed above, the Reserve Bank helps RITS participants to manage their liquidity risk by making intraday liquidity available to participants, subject only to their ability to provide eligible securities. Furthermore, liquidity risk to participants is mitigated by the design of the RITS queue, which uses a liquidity efficient next-down looping algorithm (Figure 2). It also incorporates a bilateral auto-offset mechanism that helps prevent gridlock, and targeted bilateral offset functionality.[1]
The Reserve Bank also monitors RITS in real time for any functional problems, including those that may impact on liquidity. Monitoring includes checks as to whether a participant's payments are consistent with previously observed patterns and viewing queued payments information to ensure bottlenecks are not occurring. Where necessary, the Reserve Bank liaises with participants to improve liquidity management performance and avert potential problems. These arrangements, which are set out in an internal policy document, have been successful in ensuring the smooth operation of RITS. By number, over half of each day's settlements occur before noon, while half of the value is settled by 2.15pm (Table 2).
Nevertheless, there is a significant peak in settlements towards the end of the day. This suggests that liquidity recycling in the system could be improved, and entails a risk that a large value of payments could be affected if an operational problem (at the level of either the participant or the central system) occurred late in the day and could not be resolved quickly. Some payment systems impose throughput guidelines and pricing policies to prevent these sorts of issues. At this stage, however, the Reserve Bank is comfortable managing these issues through liaison with participants.
Participants' responsibilities
While the Reserve Bank makes intraday liquidity available to RITS participants, participants are responsible for managing their own liquidity risk. The Reserve Bank conducts open market operations in order to ensure that end-of-day system liquidity is adequate to maintain the cash rate at its target. Individual participants' holdings of eligible securities and their use of intraday repos are commercial decisions for each participant. The tools in RITS which facilitate participants' liquidity management are set out in the RITS Overview of Functionality and discussed below.
RITS participants have access to a range of information to enable them to manage their liquidity risk through the RITS interface, accessed via the internet or Austraclear's proprietary ANNI network. This interface provides participants with real-time information to manage their liquidity efficiently. In particular, RITS participants can view 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.
The sub-limit feature of RITS allows participants to efficiently manage and conserve liquidity. Participants can determine the way in which individual transactions draw on liquidity by setting the payment status (‘deferred’, ‘active’ or ‘priority’) and reserving liquidity for priority payments using a sub-limit (Figure 3). Payments with a deferred status are not tested for settlement until their status is amended. Active payment instructions are settled so long as the level of the paying institution's ESA balance remains above the participant's specified sub-limit. Priority payments, by contrast, are tested against the full ESA balance. This functionality can be accessed through either the RITS user interface or via SWIFT messages, and sub-limits can be changed at any time during the settlement day.
4. Prompt Final Settlement
Core Principle IV: The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day.
4.1 Assessment of compliance
RITS complies with this principle. RITS is an RTGS system; once payment instructions and funding ability are validated, payments are settled in real time with immediate finality.
4.2 Finality of settlement
Payment in RITS is final and irrevocable upon the simultaneous debit and credit of the paying and receiving participants' ESAs at the Reserve Bank.[2] As discussed in section 1.3, an approval under Part 2, Section 9 of the PSNA provides legal certainty for settlement in RITS in the face of participant insolvency. As such, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound.
Given the irrevocability of settlement in RITS, the RITS Regulations give the Reserve Bank the ability to suspend a participant's membership and remove its unsettled transactions from the system queue if the Reserve Bank becomes aware of an insolvency event in respect of that participant, or otherwise has reason to believe that participant will be unable to fund its settlement obligations. The RITS Regulations require each member to immediately advise the Reserve Bank if it becomes aware of an insolvency event in respect of itself (or a suspected insolvency event in respect of another participant). If the Reserve Bank suspends a participant, it must inform that participant and may give notice of the suspension to all members.
4.3 Timing of settlement
Payments are settled with finality in RITS as soon as payment instructions and funding availability are validated. Payment instructions submitted to RITS are automatically checked to ensure the message and entry fields are valid, with valid payment instructions placed on the system queue for settlement testing. (The transaction types that are valid for settlement in the various sessions during the RITS day are explained below.) A payment is queued until settlement is possible using some combination of funds in the paying member's ESA and bilaterally offsetting payments. When this test is successful, the payment is settled irrevocably.
Although settlement occurs as soon as payment instructions and funding availability are validated, a payment need not settle in RITS on the day the payment instruction is made, although the vast majority do. Indeed, until a payment has been settled, the sending participant may recall the transaction from the queue if it is no longer intended for settlement in that session. Occasionally, the sending participant will set the status of a payment to deferred to prevent it from settling in that session but will not recall it. At the end of a session, transactions that are no longer eligible for settlement are removed from the queue (with notification sent to the paying participant) and may be resubmitted in a subsequent session if still intended for settlement. These arrangements – detailed in the RITS Overview of Functionality – in no way compromise the finality of settlement in RITS.
Standard settlement hours in RITS, as established by the RITS Conditions of Operation, are 7.30am to 6.30pm (Australian Eastern Standard Time) and from 7.30am to 8.30pm during Australian Eastern Daylight Time (the first Sunday in October to the first Sunday in April). Prior to 9.15am, settlement is limited to RITS cash transfers and interbank Austraclear transactions (during the morning settlement session) and the deferred net obligations from the 9am batch (during the 9am processing session) (Figure 4). Other payment instructions can be submitted to RITS during this time, but they will not be tested for settlement until the main day session commences.
The evening settlement session is designed to facilitate CLS Bank settlement. Only ‘evening agreed’ settlement participants, as defined in the RITS Regulations, can participate fully in the evening settlement session from 5.15pm onwards. 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, any remaining queued payments involving non-evening agreed participants are removed from the queue.[3]
The Reserve Bank has the discretion to vary the operating hours under the RITS Regulations. For example, RITS settlement session extensions may be made by the Reserve Bank in the unusual circumstances where there are substantial unsettled transactions remaining at the scheduled session close time. Participants may request extensions to session times, according to procedures outlined in the RITS Overview of Functionality. The decision to extend a settlement session rests with the Reserve Bank and individual requests are considered against guidelines known to participants. Participant requests for session extensions are monitored over time and action taken where necessary to improve participant settlement performance.
5. Settlement in Multilateral Netting Systems
Core Principle V: A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation.
5.1 Assessment of compliance
Not applicable. RITS is an RTGS system.
6. Settlement Assets
Core Principle VI: Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
6.1 Assessment of compliance
RITS complies with this principle. RITS settles in central bank funds through ESAs at the Reserve Bank.
7. Security and Operational Reliability
Core Principle VII: The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.
7.1 Assessment of compliance
RITS complies with this principle. RITS provides a very high level of confidentiality, integrity, authentication, non-repudiation and auditability. Over the past five years, RITS has achieved system availability of at least 99.85 per cent on an annual basis. RITS' operational reliability is ensured by continuous monitoring, in-built warning systems, clear procedures to cope with any system incidents and regular testing of the contingency arrangements. In line with international best practice, RITS is synchronously mirrored at a geographically remote backup site, which is permanently staffed. Full redundancy exists at both sites, ensuring that there is no single point of failure at either site. RITS operational risk policies and procedures are comprehensive and subject to regular rigorous review, including audits and external reviews, to ensure they remain effective over time.
7.2 Security
Access to RITS is tightly controlled using a range of security products depending on the method of access. Security policies are revisited annually and in the event of changes to either the nature of the risk or the assets being protected.
To gain access to the RITS User Interface, each user requires a RITS token with a valid and unique digital certificate; these are issued to users via a secure process. When logging on, the user must provide a user-id and password, their RITS token and a token codeword. Access rights are controlled via unique logons for each user, creating an audit trail for each action within the system. The scope of a user's access is limited according to their needs, and RITS provides for the separation of duties at all stages of payment and administrative processes. Security administrators can review event logs and follow up on unusual activity. All transactions can be traced end-to-end to prove submission and receipt, and are signed using a private key that allows for enhanced non-repudiation of the transaction.
All traffic across the various networks that are used to access RITS is secure. Access via the internet and ANNI is encrypted end-to-end using the SSL protocol. All SWIFT messages are secured using standard SWIFT security. The RITS application and supporting infrastructure is segmented using firewalls approved by the Defence Signals Directorate (the agency responsible for evaluating information security products and services used by the Australian Government), so that only authorised traffic can reach it. Within the RITS infrastructure, there is further segmentation that limits access to the RITS databases.
Physical access to the data centres where equipment is located is restricted via electronic access controls to only those staff who require access. The backup site is also designed in such a way as to provide physical protection to the building.
7.3 Operational reliability
RITS is designed to have a very high standard of operational reliability, with comprehensive procedures in place to: ensure reliability of IT infrastructure, monitor performance in real time and address potential problems early; maintain sufficient capacity; and manage change effectively. There are sufficient numbers of well-trained operational staff to ensure that the system can be operated safely at any time. To minimise key person risk, staff are cross-trained to allow greater flexibility in filling key roles.
Availability of RITS system components under the Reserve Bank's control (application software and hardware; which is targeted at 99.9 per cent) has been 99.85 per cent or higher on an annual basis throughout the assessment period of 2006 to 2009 (Table 3). Availability is measured relative to total hours available when the system is open for settlement and reporting. Availability of external network components (comprising the Austraclear and SWIFT networks) that are outside the Reserve Bank's control has been slightly lower.
Over 2008/09, there were six incidents involving RBA-controlled components of RITS, although only two resulted in downtime in RITS, the longest of which was a 30-minute delay to the opening of the RITS day session. With respect to the non-RBA-controlled components, there were two incidents in 2008/09, both involving Austraclear. Appropriate follow-up action was taken in order to avoid repeat occurrences of these incidents, according to the procedures described in section 7.5.
A complete inventory of all Reserve Bank-owned RITS hardware and software is maintained and a Service Level Agreement between Payments Settlements Department (which is responsible for operating RITS) and the Reserve Bank's Systems and Technology Department (which provides IT infrastructure and support) sets out minimum acceptable standards for this equipment. Minimum service and operational standards for the external network components of RITS (ie, Austraclear and SWIFT) are set out in agreements between the Reserve Bank and the relevant operator. Under the RITS rules and procedures, RITS members are required to have operational capacity and backup commensurate with their business operations and importance to the system as a whole. The RITS Help Desk monitors RITS in real time for any potential operational problems at either the system or participant level. To aid in this process the Help Desk has access to tabular data and graphical representations. The performance of all IT equipment is automatically monitored – including hardware availability, CPU utilisation, physical memory utilisation and database utilisation – with notification alarms sent to IT Operations staff at pre-defined trigger points. Procedures are in place to escalate issues as appropriate to address potential problems early and notify relevant staff.
Regular performance and capacity testing ensures that RITS has sufficient capacity to handle significant increases in volume. The Reserve Bank ensures that RITS has sufficient operational capacity to process a peak day's transactions in less than two hours. Capacity is targeted to be sufficient to accommodate projected volumes 18 months in advance, with 20 per cent headroom. Current capacity exceeds these targets.
Rigorous change management policy and procedures exist to protect the integrity and quality of the IT software and hardware. Changes are subject to stringent testing, using separate test environments, before implementation is approved. Where necessary, system participants are involved in this testing. Major or high-risk changes are implemented outside operating hours, to allow time for verification before the system opens. All changes have appropriate back-out plans.
7.4 Business continuity
RITS is synchronously mirrored at a geographically remote backup site, which is permanently staffed. Full redundancy exists at both sites, ensuring there is no single point of failure at either site. RITS can be operated from the backup site indefinitely as the backup site has the same processing capacity as the primary site. From late 2009, production operations will be alternated between the primary and backup sites on a regular basis. Critical staff also have the ability to work from home through remote login using a Virtual Private Network. The recovery time target is between 15 and 40 minutes, depending on the severity of the operational problem. In all cases, synchronous backup means RITS has a zero recovery point and no transaction data have ever been lost.
Detailed Contingency Event Plans have been developed, and all key scenarios are tested at least annually. The scenarios cover the failure of individual servers, firewalls, routers, links and site outages. The tests involve all elements of the policy, including network providers and utilities. To ensure staff are fully aware of the arrangements and procedures, staff are tested on this knowledge in regular ‘at-desk’ contingency drills. All contingency procedures can be easily referenced in a single document, which is continually updated.
The RITS Help Desk monitors RITS in real time for any problems at either the system or participant level, and participants are required to notify the Help Desk immediately on becoming aware of any technical problem affecting their RITS transaction activity.
In the event of an incident, there are clear procedures for prioritising and escalating to the appropriate decision makers. Crisis management procedures include the provision of timely information to stakeholders, including RITS members and interdependent systems. A web-based crisis communication facility for RITS enables the operator to disseminate information via email, SMS and voice messages to a large number of stakeholders within minutes. This facility can also be operated from remote locations and does not rely on the availability of either the primary or backup site. Conference call facilities can also be quickly invoked to enable discussion between key stakeholders.
In the extremely low-probability event that both the primary and backup sites were rendered inoperable and RTGS processing was abandoned for the day, fallback arrangements in Austraclear and HVCS may be invoked. These allow for interbank settlement on a deferred net basis the following day.
7.5 Risk assessment and review
Operational risk policies (which cover security and operational reliability issues) are developed and approved by the senior management of the Payments Settlements Department. All operational risks are documented and addressed, using a framework developed and overseen by the Reserve Bank's Risk Management Unit, which reports to the Reserve Bank's Risk Management Committee. Under this framework, all risks are identified and described, their impact and probability is assessed, mitigating controls are implemented and responsibility for managing the risk is assigned. In addition to periodic reviews of operational risk policies, risks are always re-assessed following an incident and policies varied as appropriate.
The Reserve Bank requires incident reports and undertakes intensive follow-up on internally and externally sourced RITS-related incidents to ensure action is taken to avoid repeat occurrences. Payments Settlements Department maintains a database of known incidents that is used to identify and follow up on persistent problems.
RITS is subject to an extensive audit programme conducted by the Reserve Bank's Audit Department on at least an annual basis. The Reserve Bank's internal audit programme is comprehensive comprising, but not limited to, technical reviews and regular operational inspections. The Reserve Bank employs external auditors to review the work of the internal Audit Department; these auditors have the option of directly auditing RITS. RITS is also subject to external audit reviews by the Australian Government's Australian National Audit Office. In addition, over the past two years Payments Settlements Department has initiated five external reviews, focusing mainly on security policies and procedures as this was considered the highest priority area.
8. Efficiency
Core Principle VIII: The system should provide a means of making payments which is practical for its users and efficient for the economy.
8.1 Assessment of compliance
While this principle requires considerable subjective assessment, the Reserve Bank's assessment is that RITS complies with this principle.
8.2 Objectives of RITS
The Australian financial system is characterised by deep financial markets, a wide range of financial instruments and large values of foreign exchange transactions. Participants in these markets require a payment system providing prompt final settlement, with minimum exposure to other participants. Thus the Reserve Bank's objective in developing and operating RITS is to provide the infrastructure through which high-value payments can be made in a safe and efficient manner, in order to support Australia's financial markets.
As an RTGS system, RITS prevents the build-up of unsettled interbank obligations (and the associated credit risk) throughout the day. This is consistent with best practice for a developed economy with reliable infrastructure (eg, electricity and telecommunications). RITS also provides an opportunity for participants in Australia's financial markets to manage foreign exchange settlement risk by settling foreign exchange transactions on a payment-versus-payment basis through CLS Bank.
8.3 Efficiency
The design of RITS is efficient in that it takes advantage of Australia's skilled workforce and sophisticated use of technology to provide an international best practice electronic RTGS system at a reasonable cost to users and the economy as a whole.
The objective of RITS pricing is to recover the Reserve Bank's operational cost of running RITS. Currently, this is met by a flat transaction fee. ESA holders pay a fee of $0.88 (plus 10 per cent goods and services tax) for each debit and credit to their ESA through RITS. The social cost of RITS amounts to the development costs absorbed by the Reserve Bank. To ensure that the benefits of any new development outweigh the costs, the Reserve Bank consults widely on any proposed changes, as was the case with the initial development of RITS in the late 1990s (see Self-assessment of the Reserve Bank Information and Transfer System, August 2005 for further details).
RITS is designed to be liquidity efficient. The benefit of an RTGS system (compared with the deferred net mode of settlement) in terms of the elimination of unintended credit exposures between participants comes at the cost of somewhat reduced liquidity efficiency. The design of RITS minimises the liquidity needs of participants to the extent possible. RITS has a central queue which incorporates a bilateral auto-offset mechanism (see section 3.4 for details). RITS also incorporates tools that allow participants to manage their payments in an efficient manner, including providing real-time information and a queue management facility that allows participants to prioritise payments. Liquidity is recycled such that on average, each dollar of liquidity is used around ten times each day.
The Reserve Bank makes intraday liquidity available to participants through interest-free intraday repos (limited only by their holdings of eligible securities). While participants do incur a transaction fee and must pay an initial margin when they take out an intraday repo, the primary driver of participants' liquidity costs is the opportunity cost of the eligible securities sold under repo. However, the opportunity cost of holding eligible securities is relatively low due to the wide range of eligible securities and the overlap with overnight capital holdings related to prudential requirements. Furthermore, the extent of individual participants' use of intraday liquidity reflects the trade-off between their opportunity cost of holding eligible securities and the cost of delaying the settlement of payments intraday.
The efficiency of RITS is further enhanced by the fact that it allows participants significant freedom to choose the appropriate level of service (and associated fixed cost) based on their needs and degree of sophistication. This ensures RITS is a practical payments solution for all users. The design of RITS allows participants to choose the most cost-effective means of linking their proprietary payments processing systems to RITS. Participants' ability to integrate their proprietary systems with RITS is facilitated by the use of SWIFT messages, which are based on international standards. The variety of queue-management features available in RITS minimises the degree of sophistication required of participants' proprietary systems. Participants who have relatively low RTGS transactions values (less than 0.25 per cent of total value) also have the option (subject to approval) to settle via an agent, reducing their fixed costs further.
9. Access Criteria
Core Principle IX: The system should have objective and publically disclosed criteria for participation, which permit fair and open access.
9.1 Assessment of compliance
RITS complies with this principle. The eligibility criteria have been developed with the aim of allowing fair and open access to RITS. These access criteria are objective and publicly disclosed in media releases, available on the Reserve Bank's website.
9.2 Eligibility criteria
Since settlement in RITS occurs using central bank money, only an institution with an ESA at the Reserve Bank can be a settlement member in RITS.[4] Furthermore, since RITS is the only means of access to ESAs, all ESA holders must be members of RITS, meeting all of its operating conditions and charges. Thus, the eligibility criteria for ESA holders effectively form the eligibility criteria for settlement membership in RITS. These criteria are established by the Payments System Board of the Reserve Bank, and are set out in the March 1999 and March 2003 media releases.[5] To obtain an ESA an applicant must be:
- an actual or prospective provider of third-party (customer) payment services with a need to settle clearing obligations with other providers;[6]
- able to demonstrate that they have the liquidity to meet settlement obligations under routine conditions, during seasonal peaks and under periods of stress; and
- satisfy the Reserve Bank that they have the necessary operational capacity.
The eligibility criteria are designed to enhance competition in the provision of payment services by allowing all providers of third-party payment services access, irrespective of their institutional status.
The second criterion listed above addresses the ability of participants to manage liquidity risk, including that associated with operating in the RTGS system. Furthermore, the Reserve Bank has the ability to impose additional requirements on applicants as reasonably necessary to manage the liquidity and operational risks that participants bring to the RTGS system. This reduces the likelihood that an individual participant could disrupt the operation of RITS through defaulting, becoming a liquidity sink,[7] or excessively delaying payments. Additional requirements are imposed as follows:
- organisations not supervised by APRA that participate in deferred net settlement systems that settle in RITS (ie, the daily 9am and CHESS batches) and therefore build up credit exposures in these systems, have to meet collateral requirements on an ongoing basis (unless they are always net receivers in the payments clearing arrangements);[8] and
- collateral requirements may be imposed on any institution on a transitional basis if that institution has only limited payments experience.
The access arrangements to RITS are also designed to be efficient, in that disproportionate requirements are not imposed on smaller participants. Institutions whose payments consistently account for less than 0.25 per cent of all RTGS transactions may make RTGS transactions through an agent, rather than as direct participants in RITS.[9] Indirect participation in RITS is not available more broadly because of the concern that it might lead to a high degree of concentration of payments through a few direct participants, and thus an unacceptable concentration of liquidity and operational risks in these participants. Indirect participation also introduces credit risk for participants because settlement between an indirect participant and its settlement agent occurs in commercial bank money. Although some smaller institutions are thus required to participate in RITS directly, the cost of technical access to RITS was reduced significantly by the introduction of the internet browser-based user interface in 2006.
9.3 Termination of participant membership
The rules relating to suspension, termination and resignation from RITS are set out in the RITS Regulations. The Reserve Bank may at any time terminate or vary the terms of the membership of any institution, or impose particular conditions on an institution's membership of RITS. In addition to these rights, the Reserve Bank may suspend, for such a period as it considers appropriate, any member: who fails to comply with any provision of the RITS Regulations; who is guilty of any conduct regarded by the Reserve Bank to be contrary to the interests of the members of the system; or who has become insolvent. A member may resign by giving the Reserve Bank one month's notice in writing or, if the Reserve Bank agrees, a shorter period of notice.
10. Governance
Core Principle X: The system's governance arrangements should be effective, accountable and transparent.
10.1 Assessment of compliance
RITS complies with this principle.
10.2 Effective governance arrangements
RITS is owned by the Reserve Bank and operated as a functional area of the Reserve Bank – it is not a separate entity. The management and operation of RITS fall under the governance structure of the Reserve Bank, and are subject to its normal Reserve Bank Board oversight, decision-making and audit processes (Figure 5). The Governor and Deputy Governor of the Reserve Bank are appointed by the Australian Government in accordance with the Reserve Bank Act. The Governor is the chief executive of the Reserve Bank (as an independent statutory authority) and chairman of the Reserve Bank Board and Payments System Board. The Governor reports to these boards and is accountable for the policy decisions and performance of the Reserve Bank.
Decisions affecting the day-to-day operations, customer relations and development of RITS are the responsibility of the Payments Settlements Department of the Reserve Bank. Clear procedures are in place to elevate day-to-day operational matters within Payments Settlements Department and other areas of the Reserve Bank, as appropriate. Decisions concerning the operation of RITS and ESAs are required to be consistent with the policy environment determined by Payments Policy Department (the functional area of the Reserve Bank responsible for payments system oversight) and approved by the senior executive of the Reserve Bank (through the Executive Committee).
Payments Settlements Department is part of the Reserve Bank's Banking and Payments Group, which is headed by an Assistant Governor and is subject to frequent operational audits conducted by the internal audit area of the Reserve Bank. The Reserve Bank Audit Committee – comprising two non-executive members of the Reserve Bank Board, the Deputy Governor of the Reserve Bank and an external appointed member – meets quarterly. Minutes of the Audit Committee are circulated to the Reserve Bank Board and discussed as appropriate.
The Payments System Board of the Reserve Bank has responsibility for oversight of payment systems, including RITS, to ensure compliance with its payments system policy. Monitoring of RITS for this purpose is conducted by the Payments Policy Department of the Reserve Bank, which is separate to Payments Settlements Department in the organisational structure, with separate reporting lines up to and including the level of Assistant Governor. The Payments Policy and Payments Settlements Departments meet regularly to discuss policy issues and operational developments, and the Payments System Board is periodically updated on developments.
10.3 Accountability and transparency
The Reserve Bank website provides a detailed description of RITS, including the Reserve Bank's role in its operation and oversight. It includes a description of ESAs and their eligibility requirements, details of securities that can be used in overnight and intraday repos, and the mechanics of how these are used to generate liquidity. The website also includes statistics on RTGS transactions, and media releases and other publications relating to payments system matters. The roles of the various parts of the Reserve Bank in operating and overseeing RITS, and the governance structure of the Reserve Bank more generally, are also described in material available on the Reserve Bank website.
The RITS governance arrangements ensure accountability and transparency to RITS participants and other relevant parties.
- Consultation with users and other parties in relation to prospective changes to RITS is the responsibility of Payments Settlements Department. This department liaises with system users, including via semi-annual user-group forums, to discuss current developments and prospective changes to the system. For specific projects, operational and technical working groups are formed to facilitate feedback from users. The Reserve Bank is also represented on the management committee of HVCS.
- All decisions affecting the operation of RITS are advised to participants. Policy decisions that impact upon RITS are also advised by media release. Major decisions and the reasons for them are explained in the Reserve Bank's Annual Report and, if relevant, in the Payments System Board Annual Report.
Accountability and transparency to the community more generally is ensured by the appearance of the Governor and other Reserve Bank executives semi-annually before a Parliamentary committee (the House of Representatives Standing Committee on Economics). This Committee may ask the Governor and other Reserve Bank executives questions on aspects of the Reserve Bank's functions and responsibilities, including those related to the payments system. The Committee is responsible for inquiring into the activities of the Reserve Bank and ensuring its transparency and accountability to Parliament, the financial sector and the community as a whole. Reports of the Committee are tabled in the House of Representatives.
Footnotes
When each payment is examined, the bilateral auto-offset mechanism searches the queue for offsetting payments between the same participants which can be settled simultaneously thereby minimising the amount of liquidity required. The targeted bilateral offset functionality allows a pair of participants to select specific payments to be settled simultaneously. [1]
This is the case even where a participant has sent a payment instruction in error; in such circumstances it is up to the parties to the transaction to bilaterally negotiate a solution to the problem. The RITS Regulations provide for the Reserve Bank to reverse erroneous ESA entries caused by RITS itself. [2]
Non-evening agreed participants can only re-submit (or submit new) RITS cash transfers and interbank Austraclear transactions during the evening settlement session; they cannot submit any SWIFT transactions. Evening agreed participants can submit any of these transaction types, except customer SWIFT payments, for settlement in the evening session. Any unsettled transactions between evening agreed participants submitted during the day session remain on the queue and are tested for settlement during the evening settlement session. [3]
A separate class of member – RITS non-transactional member – that does not undertake transactions within RITS does not require an ESA, and so is exempt from the ESA eligibility criteria. These members require RITS non-transactional membership either to participate in the Reserve Bank's open market operations or as batch administrators, but they do not require an ESA because they do not participate directly in RITS. See Eligible Counterparties and Batch Settlement in RITS for the relevant eligibility criteria. [4]
See March 1999 Media Release and March 2003 Media Release [5]
This encompasses all ADIs (as defined by APRA) and a range of other institutions. In general non-ADI applicants must be current or prospective members of a payments clearing arrangement or operate a clearing house that acts as a central counterparty, as ESAs will be provided only for settlement obligations from the clearing process. [6]
Liquidity sink describes a situation where a participant is able to receive but not send payments, and thereby drains liquidity from the system. [7]
To address this risk in the case of institutions supervised by APRA, the Reserve Bank generally relies on APRA's prudential supervision of these institutions. [8]
The Reserve Bank requires all authorised banks to be RITS members and have an ESA for contingency purposes, even if they settle through an agent. [9]