Source: https://rba.gov.au/payments-and-infrastructure/rits/self-assessments/2020/appendix-b.html
Timestamp: 2020-08-12 01:48:36
Document Index: 334056504

Matched Legal Cases: ['art 2', 'art 2', 'art 3', 'art 2', 'art 3', 'art 4', 'art 4', 'art 2', 'art 4']

Appendix B: Detailed Assessment of the Reserve Bank Information and Transfer System | 2020 Assessment of the Reserve Bank Information and Transfer System | RBA
2020 Assessment of the Reserve Bank Information and Transfer System Appendix B: Detailed Assessment of the Reserve Bank Information and Transfer System
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This appendix sets out the detailed assessment of how well RITS observed the Principles developed by CPMI and IOSCO as at the end of March 2020. The Assessment focuses on RITS's role as a wholesale RTGS system; in respect of the FSS, only the interaction with the core (wholesale) RITS system is assessed (see section 2 for more information on the assessment scope). This Assessment was produced by the Bank's Payments Policy Department, which is the functional area responsible for oversight of the payments system, primarily drawing on information provided by the Bank's Payments Settlements Department, which is the functional area responsible for operating RITS. In 2019, Payments Policy Department began to expand its direct engagement with other key departments involved in the operation and governance of RITS, such as the Information Technology Department. The conclusions of this assessment have been approved by the Payments System Board. In its assessment, Payments Policy Department has applied the rating system used in the CPMI-IOSCO Disclosure Framework. Under this framework, observance of each of the applicable Principles is rated according to the following scale:
Observed – Any identified gaps and shortcomings are not issues of concern and are minor, manageable and of a nature that the FMI could consider taking them up in the normal course of its business.
Broadly observed – The assessment has identified one or more issues of concern that the FMI should address and follow up on in a defined timeline.
Partly observed – The assessment has identified one or more issues of concern that could become serious if not addressed promptly. The FMI should accord a high priority to addressing these issues.
Not observed – The assessment has identified one or more serious issues of concern that warrant immediate action. Therefore, the FMI should accord the highest priority to addressing these issues.
Not applicable – The standard does not apply to the type of FMI being assessed because of the particular legal, institutional, structural or other characteristics of the FMI.
The ratings of RITS against the relevant Principles are supplemented by detailed information under each key consideration that is relevant to the assessment. In assessing RITS, Payments Policy Department has relied on guidance on the Application of the Principles for Financial Market Infrastructures to Central Bank FMIs published by CPMI and IOSCO in August 2015.[37]
Note: Principles 6 (margin), 10 (physical deliveries), 11 (central securities depositories), 14 (segregation and portability), 20 (FMI links) and 24 (disclosure of market data by trade repositories) are not applicable to systemically important payment systems and have therefore been omitted.
A payment system should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
Rating: Observed
1.1 The legal basis should provide a high degree of certainty for each material aspect of a payment system's activities in all relevant jurisdictions.
RITS is owned and operated by the Bank. The legal basis of all key aspects of RITS is set out in the RITS Regulations, which cover the operation of RITS, and the rights and obligations of members and the Bank.[38] Standard agreements are executed to bind each member to the RITS Regulations. In addition to the RITS Regulations, the following key aspects of RITS activities are supported by Australian legislation and additional contractual arrangements.
RTGS feeder systems
RITS accepts settlement instructions from approved feeder systems. Admission as a feeder system is by specific reference in the RITS Regulations. The RTGS feeder systems are the SWIFT PDS, Austraclear, CHESS RTGS and NPP.[39] The SWIFT PDS is administered by Australian Payments Network (AusPayNet) under its HVCS. The Bank and AusPayNet each have contractual arrangements with SWIFT covering the SWIFT PDS. The Austraclear and CHESS RTGS feeder systems are operated by Austraclear and ASX Settlement, respectively. Both entities are wholly owned subsidiaries of ASX Limited. The Bank has separate contractual arrangements with Austraclear and ASX Settlement covering these feeder systems. The NPP feeder system is operated by New Payments Platform Australia Limited (NPPA) and is covered under a contractual arrangement between the Bank and NPPA.
The RITS Regulations state that settlement is final when the ESAs of the paying and receiving members in RITS are simultaneously debited and credited, respectively. The irrevocability of payments settled in RITS is protected by RITS's approval as an RTGS system under Part 2 of the Payment Systems and Netting Act 1998 (PSNA). With this approval, a payment executed in RITS at any time on the day on which a RITS member enters external administration has the same standing as if the member had gone into external administration on the next day (in the case of a winding up) or as if the member had not gone into external administration (in the case of other forms of external administration). Accordingly, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound simply because of the event of external administration (i.e. they are protected from the ‘zero-hour’ rule). The PSNA also, among other things, clarifies that resolution of a financial institution is a form of non-terminal administration, and that a payment executed in RITS when a member has gone into non-terminal administration has the same effect it would have had if the member had not gone into non-terminal administration.
The irrevocability of settled transactions originating from the Austraclear and CHESS RTGS feeder systems is supported by their respective approvals as RTGS systems under Part 2 of the PSNA.
In the unlikely event that RITS is unavailable for a significant period of time, payments arising from Austraclear and the SWIFT PDS can be settled using contingency arrangements. These arrangements involve the multilateral netting and settlement of transactions arising from those systems. The irrevocability of settlement under these contingency arrangements is supported by the approval of Austraclear and HVCS as netting arrangements under Part 3 of the PSNA. The approval of HVCS establishes the legal basis for the netting of SWIFT PDS payments.
While RITS is primarily an RTGS system, it also provides for the final settlement of net obligations arising in other payment and settlement systems. This is either through the LVSS or the batch feeder functionality.[40] RITS's approval under Part 2 of the PSNA does not ensure the legal certainty of the netting of the underlying obligations. Nevertheless, the majority of the value of obligations settled in these multilaterally netted batches originates from AusPayNet clearing streams and transactions settled in the CHESS and eftpos batches, which are approved netting arrangements under Part 3 of the PSNA.
Enforceability of repurchase agreements
The enforceability of repos in the event of a default also requires a high degree of legal certainty. Repos with the Bank are governed by an international standard agreement – Securities Industry and Financial Markets Association (SIFMA)/International Capital Market Association (ICMA) Global Master Repurchase Agreement (GMRA) (2011 version) – as amended by an annexure to the RITS Regulations. This agreement sets out, among other things, what constitutes default and the consequential rights and obligations of the parties. In the event of a default, the agreement allows the non-defaulting party to terminate the agreement, calculating the net obligation based on the prevailing market value at the time the contract is closed out. Close-out netting provisions included in repo contracts with RITS members provide for the immediate liquidation of collateral in the event of default. This right is supported by Part 4 of the PSNA.
1.2 A payment system should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations.
To facilitate a clear understanding of RITS rules and procedures, the RITS Regulations are supplemented by user guides and other documentation that explain RITS requirements and functions. This material facilitates existing and prospective members' understanding of the RITS Regulations and the risks they face by participating in RITS.
The Bank seeks external legal advice on material amendments to the RITS Regulations and associated contractual agreements, including, where relevant, on the interaction of such amendments with Australian and New South Wales laws and regulations.
1.3 A payment system should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants' customers, in a clear and understandable way.
At a high level, the legal basis for RITS is articulated in a clear and understandable manner on the Bank's website and the RITS Information Facility.[41], [42]
1.4 A payment system should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the payment system under such rules and procedures will not be voided, reversed, or subject to stays.
To ensure that the RITS Regulations and associated contractual agreements are enforceable, the Bank seeks external legal advice on material amendments to these documents.
There have been no court cases that have tested the RITS legal framework.
1.5 A payment system conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions.
The RITS Regulations are governed by New South Wales law and require that all members submit to the non-exclusive jurisdiction of the courts of New South Wales. Since 2011, the Bank has required foreign RITS applicants to provide a legal opinion affirming that the RITS membership legal documents constitute valid, legally binding and enforceable obligations.[43] This opinion must cover whether the courts in the home jurisdiction of the applicant will give effect to the choice of New South Wales law as the governing law and whether the judgement of an Australian court would be enforceable in the home jurisdiction without retrial or re-examination. Following the signing of new RITS Membership Agreements in 2017, the Bank continued to work with foreign members on the provision of legal opinions that meet the Bank's requirements in cases where members had not provided a legal opinion previously or their previous opinion required updating. Legal opinions have been received from the majority of foreign members. The Bank expects to complete this process during the next assessment period.
A payment system should have governance arrangements that are clear and transparent, promote the safety and efficiency of the payment system, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
Note: In line with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, as RITS is operated as an internal function of the Bank, Key Considerations 2.3 and 2.4 are not intended to constrain the composition of the Bank's governing body or that body's roles and responsibilities.
2.1 A payment system should have objectives that place a high priority on the safety and efficiency of the payment system and explicitly support financial stability and other relevant public interest considerations.
RITS is owned and operated by the Bank. The high-level objectives of the Bank are set out in the Reserve Bank Act 1959 . The Bank's duty is to contribute to the stability of the currency, maintenance of full employment, and the economic prosperity and welfare of the Australian people. Stability of the financial system is also a longstanding responsibility of the Bank – a mandate confirmed by the Australian Government when it introduced significant changes to Australia's financial regulatory structure in July 1998.[44]
The Bank's website states its specific objectives in relation to its operation of RITS.[45] In particular, the Bank's objective in developing and operating RITS is to provide the infrastructure through which settlement obligations arising from the exchange of high-value payments and debt securities settlements can be extinguished in a safe and efficient manner. The design of RITS ensures that there is no build-up of settlement exposures associated with high-value transactions, which in turn promotes the stability of Australia's financial system. Reflecting the critical importance of RITS to the Australian financial system, the Bank aims to operate RITS at an extremely high standard of availability and resilience, and to ensure that its settlement services continue to evolve to meet the changing needs of the broader payments system.
Decisions concerning the operation of RITS and ESAs are required to be consistent with the policy environment determined by Payments Policy Department, which under the governance of the Payments System Board carries out oversight of RITS and supervision of clearing and settlement facilities licensed in Australia. The broad mandate of the Payments System Board, which is set out in the Reserve Bank Act, places a high priority on the safety and the efficiency of the wider Australian payments system.[46]
2.2 A payment system should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, relevant authorities, participants, and, at a more general level, the public.
Since it is not operated as a separate entity, the management and operation of RITS fall under the governance structure of the Bank, and are subject to the Bank's normal oversight, decision-making and audit processes. The Bank has clear and transparent governance arrangements. Information on the Bank's governance arrangements for RITS is documented on the Bank's website and described in section A.3.[47]
The Bank's governance arrangements reflect relevant provisions of the Reserve Bank Act and the Public Governance, Performance and Accountability Act 2013 . In accordance with the Reserve Bank Act, the Governor is responsible for the management of the Bank and is therefore ultimately responsible for the operation of RITS. In fulfilling his responsibilities to manage the Bank under the Reserve Bank Act and as the accountable authority under the Public Governance, Performance and Accountability Act, the Governor is assisted and supported by the Executive Committee, which is comprised of senior executives. The Executive Committee is the principal decision-making committee in the Bank at which matters that have a strategic or Bank-wide significance are discussed by the Bank's senior executives. Accordingly, major decisions related to RITS are considered by the Executive Committee.
Decisions affecting the day-to-day operations, customer relations and development of RITS have been delegated to the Bank's Payments Settlements Department. Payments Settlements Department is part of the Bank's Business Services Group, which is headed by the Assistant Governor (Business Services) who reports to the Governor and Deputy Governor. Clear internal procedures are in place to elevate day-to-day operational matters within Payments Settlements Department and other areas of the Bank, as appropriate.
Oversight of RITS is carried out by the Bank's Payments Policy Department, within the policy framework for which the Payments System Board has ultimate responsibility. Payments Policy Department is separate from Payments Settlements Department in the Bank's organisational structure, with separate reporting lines up to and including the level of Assistant Governor. The two departments nevertheless meet regularly to discuss policy issues and operational developments, and the Payments System Board is periodically updated on relevant developments.
As an independent central bank and statutory body, the Bank is ultimately accountable to the Parliament of Australia. Since 1996, the Governor and senior officers of the Bank have appeared twice yearly before the House of Representatives Standing Committee on Economics to report on matters under the responsibility of the Bank. The Reserve Bank Act also requires that the Bank inform the Australian Government of its policies ‘from time to time’. In addition, to fulfil its obligations under the Public Governance, Performance and Accountability Act, the Bank prepares an annual report for presentation to the Treasurer and tabling in the Parliament.[48]
2.3 The roles and responsibilities of a payment system's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should review both its overall performance and the performance of its individual board members regularly.
As described in Key Consideration 2.2, the Governor, with assistance from the Executive Committee, is ultimately responsible for the management of the Bank, including the operation of RITS. The roles and responsibilities of the Governor are set out in the Reserve Bank Act and the Public Governance, Performance and Accountability Act. The role of the Executive Committee is set out in its terms of reference.
In recognition of the Governor's responsibility for maintaining a reputation for integrity and propriety on the part of the Bank, the Governor and other members of the Executive Committee are subject to the Code of Conduct for Reserve Bank Staff, which places a high priority on integrity and has provisions that address potential conflicts of interest. Specific Bank policies deal with potential conflicts of interest arising from the Bank's roles as the principal regulator of the payments system and as provider of banking services to the Australian Government.[49]
2.4 The board should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).
Under the terms of the Reserve Bank Act, the Governor is appointed by the Treasurer. Since RITS is owned by the Bank, and is not operated as a separate legal entity, the skills and qualifications of the Governor are determined in accordance with the Bank's broader responsibilities. The Bank has human resources policies in place to help ensure that senior staff, including members of the Executive Committee, have the appropriate skills and incentives. These policies are described in Key Consideration 2.5.
2.5 The roles and responsibilities of management should be clearly specified. A payment system's management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the payment system.
The roles and responsibilities of the management responsible for the day-to-day operation of RITS are clearly documented in position descriptions.
The Bank has human resources policies in place to help ensure that management positions are filled with employees with the appropriate skills, incentives, experience and integrity to perform their duties. The Bank has formal performance management arrangements, which help to clarify the expectations of supervisors and employees and ensure that timely feedback is provided. Recruitment and selection at the Bank is based on the principles of being merit-based, fair, objective and open, and consistent with diversity and inclusion. It is based on the suitability of an applicant to carry out the specific requirements of the position to be filled, having regard to the applicant's ability to perform the duties of the position, relevant experience, relevant training and qualifications, and willingness to meet any particular requirement specified in the position description. Bank staff are subject to the Code of Conduct for Reserve Bank Staff (see Key Consideration 2.3).
The Bank also aims to offer remuneration packages that attract employees able to perform their duties to a high standard. To this end, remuneration for each role is benchmarked against equivalent roles in the market to ensure that remuneration policies are consistent with market practice. The Remuneration Committee of the Reserve Bank Board is kept informed of the remuneration arrangements for Bank staff.
2.6 The board should establish a clear, documented, risk-management framework that includes the payment system's risk tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk-management and internal control functions have sufficient authority, independence, resources, and access to the board.
The Bank has a well-established risk management framework that facilitates the identification, assessment and treatment of all risks – including those arising from its operation of RITS – at both an enterprise (‘top-down’) and business (‘bottom-up’) level. Risk management is seen as an integral part of the management function in the Bank. Line managers have the responsibility to evaluate their risk environment, put in place appropriate controls and monitor the effectiveness of these controls. Management is supported in this role through the development and maintenance of a culture that acknowledges the need for careful analysis and management of risk in all business processes.
The Bank's risk management framework is set out at a high level in the Bank's Risk Management Policy.[50] Risks associated with monetary and payments policies are the direct responsibility of the Reserve Bank Board and the Payments System Board, respectively. These Boards review management of risks annually as part of their decision-making processes. The Risk Management Policy is complemented by a Risk Appetite Statement, which provides an outline of the Bank's appetite for and approach to managing its most significant risks, including strategic, financial, people and operational risks. The Risk Appetite Statement is published on the Bank's website.[51]
The risk management framework, including the Risk Management Policy and Risk Appetite Statement, is governed by the Risk Management Committee, in accordance with the Risk Management Committee Charter. This Committee consists of members of the executive team who are responsible for the Bank's operational areas or key support functions. It is chaired by the Deputy Governor and comprises: the Assistant Governors for Business Services, Corporate Services and Financial Markets; the Chief Financial Officer; the Chief Information Officer; the Heads of Audit Department, Human Resources Department, Information Department and Risk and Compliance Department; and the General Counsel. The Risk Management Committee meets six times a year, or more frequently if required, and reports on its activities to both the Executive Committee and the Reserve Bank Board Audit Committee.
The Risk Management Committee is assisted in its responsibilities by Risk and Compliance Department, whose main role is to assist individual business areas to manage their risk environment within a broadly consistent framework. Risk and Compliance Department also monitors and reports on portfolio risks and compliance with respect to the Bank's operations in financial markets, and provides support to business areas in the implementation of fraud control, business continuity and compliance management. The Head of Risk and Compliance Department reports directly to the Deputy Governor.
Audit Department also supports the framework for managing risk, complementing but remaining separate from the work of Risk and Compliance Department. In addition to providing assurance that the Bank's risk management policies are effective, Audit Department has a separate, independent mandate to test the adequacy of procedures and controls at all levels of the Bank. The Head of Audit Department reports to the Deputy Governor and the Reserve Bank Board Audit Committee.
In circumstances including a significant disruption to the Bank's operations that affects several business areas, the Governor may delegate responsibility for coordination of the Bank's response, either to the Bank's Crisis Management Group or an individual. The Crisis Management Group's membership is composed of the Governor (leader), the Deputy Governor (alternate leader), other members of the Executive Committee, the Heads of Risk and Compliance Department and Workplace Department, the Chief Information Officer and Head of Communications. The Chief Warden may also attend. The Crisis Management Group responds to crises and emergencies in accordance with the Bank's Incident Management Framework.
Payments Settlements Department also maintains plans that address decision-making in crises and emergencies. These plans cover operational disruptions (see Principle 17) and the default of a RITS member (see Principle 13). The plans are required to set out how Payments Settlements Department would communicate with the Crisis Management Group during a disruption.
2.7 The board should ensure that the payment system design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.
The Bank's governance arrangements ensure accountability and transparency to RITS members and other relevant parties. To ensure the interests of relevant stakeholders are taken into account, the Bank engages in routine liaison with members and consults on all material changes to operational arrangements (see Principle 21). All decisions affecting the operation of RITS are advised to members. Policy decisions that affect RITS are also communicated to the public through media releases. Major decisions and the reasons for them are also explained in the Reserve Bank Annual Report and, if relevant, the PSB Annual Report.
3. Framework for the Comprehensive Management of Risks
A payment system should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.
Note: In line with the CPMI-IOSCO guidance on the Application of the Principles for Financial Market Infrastructures to Central Bank FMIs, since RITS is owned and operated by the Bank as one of the services that the Bank has undertaken to provide, the Bank's ability to ensure continuity of operations of the FMI as necessary in extreme financial circumstances means that the requirements to prepare recovery and orderly wind-down plans do not apply. In addition, since intervention by a resolution authority is not relevant, requirements to support resolution planning or intervention by a resolution authority in the operation or ownership of the FMI do not apply. Accordingly, the Bank has not assessed RITS against Key Consideration 3.4.
3.1 A payment system should have risk-management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the payment system. Risk management frameworks should be subject to periodic review.
The Bank's risk management framework is set out under Key Consideration 2.6. Under this framework, Payments Settlements Department is required to identify all of the risks that might impact its ability to operate RITS in a safe and efficient manner in a single risk register. Risks are categorised at a high level into strategic, credit, market and operational risks, and further sub-categorised into more detailed risk groups (e.g. liquidity risk is a sub-category of market risk). For each risk that has been identified, Payments Settlements Department sets out the consequence and likelihood of the risk occurring, and also identifies controls and mitigation strategies to reduce the consequence and/or likelihood of the risk.
Bank-wide risks, that is, those risks common across all departments are managed through a centralised framework of key controls, which is coordinated by the department assigned ownership. Other departments can implement additional controls for these risks if they consider that the risk manifests itself in a unique manner within that department. Where a risk is co-managed by another business area – for example, some RITS operational controls are implemented by the Bank's Information Technology Department – this must be acknowledged by the other business area. Department and Bank-wide risks and controls are recorded in the Risk Management System.
The Bank's Risk Management Policy requires that Payments Settlements Department reviews and updates its risk register annually and, after any major change to the Department's risk environment, to reflect any changes in risks and controls that have occurred. As part of this process, any residual risks identified in the Risk Register that are outside of the Department's risk appetite or agreed tolerance levels must be appropriately escalated. The Department's risk appetite must be consistent with the Bank's Risk Appetite Statement.
3.2 A payment system should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the payment system.
Given the design of RITS, members do not pose liquidity or credit risks to the Bank as operator of RITS (see Principles 4 and 7). RITS membership requirements aim to reduce the likelihood that an individual member would disrupt the operation of RITS. If a member does not meet these membership requirements, the Bank may apply restrictions to, or impose additional requirements on, that member (see Principle 18).
3.3 A payment system should regularly review the material risks it bears from and poses to other entities (such as other FMIs, settlement banks, liquidity providers, and service providers) as a result of interdependencies and develop appropriate risk-management tools to address these risks.
The Bank, in operating RITS, reviews the material risks that it bears from and poses to other entities. This is done in the context of its ongoing review of risks (such as the annual update of its Risk Register), and its processes for identifying risks associated with major changes to its risk environment, such as new activities or system changes. This is also part of the Bank's change management framework (see Key Consideration 17.1). The tools used to manage risks from other entities include service level agreements, customer support packages and documented operational and contingency procedures (see Key Consideration 17.7).
A payment system should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. A payment system should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.
Note: Key Considerations 4.4, 4.5 and 4.6 do not apply to RITS as it is not a CCP. Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, this Principle should not constrain the Bank's policies on the provision of credit, or the terms of or limits on such provision.
4.1 A payment system should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes. Credit exposure may arise from current exposures, potential future exposures, or both.
The Bank is not exposed to credit risk in its role as operator of RITS. Payments in RITS are settled using funds in members' ESAs, which cannot be overdrawn, and the Bank does not guarantee any transaction submitted for settlement in RITS. Accordingly, in the event of a member default the Bank would not be exposed to a loss in its role as operator of RITS.
The Bank does, however, incur credit risk in the provision of liquidity to approved RITS members under its Standing Facilities to support payments activity (see Appendix A, section A.7 for more information on these facilities). This risk is primarily managed by purchasing securities under repo, in accordance with the Bank's risk management framework. The Bank also manages the credit risk arising from its Standing Facilities by restricting the counterparties that it enters into a repo with. In particular, to access the Bank's Standing Facilities, a RITS member must be an ESA holder, a member of Austraclear, subject to an appropriate level of regulation, and able to ensure efficient and timely settlement of transactions within the Austraclear system.
Under the Bank's risk management framework, responsibility for approving and reviewing collateral eligibility lies with Risk and Compliance Management Department, with oversight from the Risk Management Committee. The policies, procedures and controls implemented to mitigate credit risk are subject to audit by Audit Department(see Key Consideration 2.6 for further detail on the Bank's risk management framework).
The RTGS mode of settling wholesale payments in RITS is also designed to ensure that unintended credit risks do not accumulate between members during the settlement process. For payments using the SWIFT PDS, transactions are settled across ESAs in RITS before payment messages are sent to the receiving member. Austraclear transactions submitted to RITS for settlement generally represent the cash legs of debt security transactions, which are settled on a delivery-versus-payment model 1 basis to mitigate the credit risk associated with the settlement process. Since RITS cash transfers are payments between two ESA holders unintended credit risk would not arise.
4.2 A payment system should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk-management tools to control these risks.
Under the Bank's risk management framework, Domestic Markets Department has responsibility for identifying and managing the credit risks that arise from its activities. For each credit risk identified, Domestic Markets Department sets out the potential impact and probability of the credit risk crystallising, and, where possible, the existing controls and mitigation strategies. These controls are reviewed and signed off by management annually, or when there are material changes to the Bank's risk environment.
The Bank incurs credit risk in the provision of liquidity to approved RITS members under repo. This credit risk is mitigated by purchasing only high-quality securities, applying appropriate haircuts to the securities, and maintaining mark-to-market margin on a daily basis (see Principle 5). Membership requirements in RITS also help to reduce the probability of a member default (see Principle 18). The Bank monitors the liquidity it provides to approved RITS members and the composition of securities that it holds on a daily basis. This information is readily available via summary reports produced by the Bank's trade entry and collateral management system (see Key Consideration 5.6).
4.3 A payment system should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (see Principle 5 on collateral). In the case of a deferred net settlement payment system in which there is no settlement guarantee but where its participants face credit exposures arising from its payment, clearing, and settlement processes, such a payment system should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system.
The credit risk assumed by the Bank in providing liquidity to RITS members is mitigated by purchasing high-quality securities under repo, which could be closed out immediately upon default of the repo counterparty. The Bank also faces a potential future loss, which would crystallise in the event that a member defaulted and the market value of collateral securities fell below the amount of credit provided under repo. This risk is mitigated by applying a haircut to the securities, calibrated to cover the maximum expected decline in the market price of the securities, over a conservative liquidation horizon, at a high level of confidence. The Bank also maintains mark-to-market margin on a daily basis to ensure that the price changes on the previous day do not erode the value of the securities it holds (see Principle 5 for further detail on eligible securities, haircuts and mark-to-market margin maintenance).
RITS is not a deferred net settlement payment system and accordingly the requirement to maintain sufficient resources to cover the exposures of the two members and their affiliates that would create the largest aggregate credit exposure in the system does not apply.
4.7 A payment system should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the payment system. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds a payment system may borrow from liquidity providers. These rules and procedures should also indicate the payment system's process to replenish any financial resources that the payment system may employ during a stress event, so that the payment system can continue to operate in a safe and sound manner.
As explained under Key Consideration 4.1, in the event of a member default the Bank would not be exposed to a loss in its role as operator of RITS. Nevertheless, the Bank maintains internal procedures that set out the course of action it would take after a member default (see Principle 13).
A payment system that requires collateral to manage its or its participants' credit exposure should accept collateral with low credit, liquidity, and market risks. A payment system should also set and enforce appropriately conservative haircuts and concentration limits.
Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, this Principle should not constrain the Bank's policies on what it accepts as eligible collateral in its lending operations.
5.1 A payment system should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks.
The Bank provides liquidity to approved RITS members via OMOs and via its Standing Facilities. Under the Standing Facilities, a bank can enter into a repo with the Bank, exchanging outright title to eligible securities in return for the credit of funds in its ESA with an agreement to reverse the transaction before the end of the day (intraday repo) or on an ‘open’ basis if permitted by the Bank (see Appendix A, section A.7 for more information on the Standing Facilities available). Eligible members can also source liquidity by participating in the Bank's daily OMOs, which are aimed at providing sufficient liquidity in the overnight interbank market so as to maintain the cash rate at its target. These transactions usually involve counterparties selling debt securities to the Bank either under term repo or outright.[52] In addition, in March 2020 the Bank established a TFF to Support Lending to Australian Businesses, and a temporary reciprocal currency arrangement with the US Federal Reserve for the provision of US dollars (US dollar swap line). The TFF was announced as part of a package of measures to support the Australian economy during the COVID-19 pandemic. The TFF provides ADIs with three year funding at a fixed cost (25 basis points) through repo against eligible securities, including the use of self-securitised assets[53]. For use of the US dollar swap line, eligible counterparties must sell eligible Australian dollar securities under repo.
The Bank only purchases highly rated debt securities denominated in Australian dollars under repo. This policy applies to all of the Bank's domestic operations, irrespective of whether the repos are contracted under the Bank's Standing Facilities, in OMOs, under the TFF or the US dollar swap line. The policy is made publicly available on the Bank's website and is reviewed from time-to-time.[54] Eligible securities are generally restricted to highly liquid securities issued by entities with high credit quality, including those issued by: the Australian Government; the central borrowing authorities of the state and territory governments (semi-government securities); certain supranational organisations, foreign governments and government agencies with an explicit government guarantee; investment grade ADIs; and the senior AAA-rated tranches of approved asset-backed securities (ABS). In May 2020, certain securities issued by non-ADIs were also made repo-eligible. For use of the TFF, ADIs may use their self-securitised assets provided they have received a related-party exemption from the Bank.
In addition, all securities must meet the following criteria:
The security must be lodged and active in Austraclear (the Australian central securities depository) at the time of settlement of an agreed transaction with the Bank.
Securities accepted as collateral must generally meet a minimum credit rating.[55]
ABS must be tradeable in the secondary market and must be based on a true sale of assets into a bankruptcy-remote special-purpose vehicle.
Securities sold to the Bank under a repo must not enter the ‘closed period to maturity’ during the term of the repo.
The Bank does not accept what it deems to be highly structured securities, such as collateralised debt obligations backed by other ABS.
Australian Government and semi-government securities are automatically eligible collateral. All other securities are subject to an initial approval process. The Bank will not purchase securities under repo until the approval process for eligibility is complete and the securities are added to the Bank's list of eligible securities.[56]
In order to assess the eligibility of the security, the minimum credit rating assigned to a security or its issuer by any of the major rating agencies will be used (except certain credit-enhanced securities such as covered bonds). For ADI-issued securities with a residual maturity greater than one year, at least two major credit rating agencies must rate the security or the issuer. For covered bonds issued by ADIs, where two or more security ratings are available, only the ratings on the security will be considered. If two security ratings are not available for ADI-issued covered bonds, the minimum issuer rating will also be considered.
Securities issued by non-ADI corporations include corporate bonds and commercial paper. For securities with a maturity of less than 12 months to be eligible, the issuer must be an Australian company.
Securities must be senior and unsubordinated. An average credit rating of at least BBB− or A-3 is required, and at least two of the recognised credit rating agencies must provide a credit rating for the security or the issuer.
The Bank routinely monitors events such as credit downgrades to ensure that its list of eligible collateral remains current. If a particular collateral security is no longer eligible, counterparties to the Bank with outstanding repos collateralised with that security are required, on a same-day basis, to substitute eligible collateral.
To enhance its risk management of ABS, the Bank requires the issuers of these securities (or their appointed information providers) to provide more detailed information in order for these securities to be eligible for repo with the Bank.[57] The criteria mitigate risks arising from the Bank's potential exposure to ABS under its Standing Facilities and the TFF. The contingent and actual exposures increased significantly following the implementation of open repos, the Committed Liquidity Facility and the TFF. The additional information, which must be kept up to date, covers both transaction-related data as well as information on the underlying assets (i.e. loan-level data).
To mitigate wrong-way risk in its operations, the Bank will not purchase securities from an approved RITS member it considers to be materially related to the credit quality of the security. Where applicable, the Bank's list of eligible securities identifies those counterparties considered to be related to specific securities. The Bank considers a material relationship to exist when the entities are members of the same corporate group, or where one entity has an ownership stake in another entity that exceeds 15 per cent.
Upon request by a member for a related-party exemption, the Bank may purchase certain related-party ABS under repo through its Standing Facilities and the TFF. However, these securities are subject to an additional haircut and additional reporting requirements. Relatedness thresholds also apply beyond which the Bank will not permit the use of the security, irrespective of the size of the haircut. The Bank considers each of the following parties to be related to an ABS: the sponsor of the issuing trust; the loan originators; servicers; swap counterparties; liquidity providers; and guaranteed investment contract providers to the issuing trust. The magnitude of any additional haircut will depend on the nature of the relationship between the member and the ABS.
In the event of insolvency, the close-out netting provisions included in the repo agreements allow the Bank to close out or terminate the second leg of the repo immediately. This right is protected by Part 4 of the PSNA. Where an approved member sells securities issued by a third-party issuer as collateral, both the member and the issuer of the security would have to fail for the Bank to potentially incur a financial loss. In the event that an approved member that had provided ABS and the issuing trust failed, the Bank would have recourse to the underlying assets (e.g. the residential mortgage loan pool).
5.2 A payment system should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.
The Bank values securities purchased under repo using available market prices. When a timely market price is not available or reliable, the Bank uses conservative valuation formulae that are reviewed regularly.
Haircuts and mark-to-market margin maintenance
The Bank applies haircuts to all securities purchased under repo.[58] For operational simplicity, uniform haircut rates are set for broad groups of securities rather than for individual securities, with an additional adjustment for approved related-party ABS depending on the degree of credit support provided to the transaction by the sponsor. Haircuts are set to cover the maximum expected decline in the market price of the security, at a confidence level of at least 95 per cent based on a look-back period that includes stressed market conditions. The key inputs to this calculation are market prices, the maturity of the securities in the relevant asset classes and the credit ratings of the securities. The Bank reserves the right to review haircuts at any time. The haircut schedule is made publicly available on the Bank's website.[59]
The Bank also maintains mark-to-market (variation) margin on a daily basis to cover changes in the value of its portfolio of securities.[60] To do this, the Bank calculates an exposure amount against each counterparty each day in respect of all securities held under repo based on the closing prices of the preceding business day. Where the Bank's net exposure to a counterparty is greater than $1 million and represents more than 1 per cent of the net repurchase amounts agreed with that party, the Bank will call for mark-to-market margin equal to its net exposure.[61] Similarly, the Bank will meet requests for mark-to-market margin from a counterparty when it has a net exposure to the Bank greater than $1 million and where that net exposure represents more than 1 per cent of the net repurchase amounts agreed with that party.
Margin is calculated and provided separately for repos contracted under OMO (which includes repos contracted under the US dollar swap line), Standing Facilities and the TFF.
5.3 In order to reduce the need for procyclical adjustments, a payment system should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.
The Bank generally applies haircuts that are calibrated to include periods of stressed market conditions. Haircuts are calibrated to capture the stressed market conditions following the default of Lehman Brothers in late 2008. This reduces the need for procyclical haircut adjustments during periods of stress.
5.4 A payment system should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.
The Bank routinely monitors transaction and collateral summary reports to ensure that it is not exposed to large collateral concentration and liquidation risks. The key factor considered by the Bank is the depth of the market for each security when compared with the Bank's holdings of that security. This mitigates the risk of a price impact from liquidation of a large collateral holding.
5.5 A payment system that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner.
The Bank mitigates the risks associated with cross-border collateral by imposing additional restrictions. The only cross-border collateral that the Bank currently accepts is very highly rated Australian dollar-denominated securities issued or guaranteed by a foreign government or issued by a supranational. The terms and conditions of these securities must be governed by Australian law. In addition, because certain cross-border securities may be less liquid than domestic securities, the Bank applies higher haircuts to these securities. There is no operational risk associated with differences in time zones since all collateral must be lodged in Austraclear. The operating hours of the Austraclear system and RITS are aligned.
5.6 A payment system should use a collateral management system that is well designed and operationally flexible.
The Bank relies on a well-designed and operationally flexible trade entry and collateral management system to manage the securities it purchases under repo. This system is an integrated trading, middle-office and back-office system, and has been extensively customised for the Bank. The system supports the buying, selling, margining, substitution and liquidation of securities in a timely manner. Transactions involving the exchange of securities with approved members are recorded and tracked in this system.[62] In addition, the system facilitates pricing of securities, application of haircuts by default, collateral substitutions, margin maintenance and coupon passes.[63] The Bank has developed within this system a large number of analytical reports to monitor counterparty and collateral exposures, repo and outright portfolio holdings, daily activity summaries and other analytics associated with the Bank's domestic operations (both for OMOs, Standing Facilities and TFF). The Bank ensures that there are sufficient resources to maintain its trade entry and collateral management system to a high standard.
RITS members have the option to use ASX Collateral services to deliver a subset of eligible securities under certain types of repos.[64] ASX Collateral is a collateral management service that acts as an agent to automate the allocation and optimisation of collateral in respect of securities held in Austraclear.[65] As agent, ASX Collateral is responsible for ensuring that securities delivered to the Bank's Austraclear account using its service are appropriately valued and meet the Bank's eligibility requirements. ASX Collateral also offers extensive reporting functionality, including reports on collateral transactions and securities held.
The Bank does not re-use securities it receives under repo.
A payment system should effectively measure, monitor, and manage its liquidity risk. A payment system should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the payment system in extreme but plausible market conditions.
Note: Key Consideration 7.4 does not apply to RITS as it does not operate a CCP.
7.1 A payment system should have a robust framework to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities.
RITS conducts its settlements on an RTGS basis and does not guarantee settlement. Under the ESA Policy, ESA balances must also be maintained in credit at all times. The Bank, as operator of RITS, does not therefore assume liquidity risk in its operations. Since members face liquidity risks, however, RITS assists members in their liquidity management through: its liquidity-efficient design; the provision of liquidity through Standing Facilities; the provision of real-time information on transactions and ESA balances; and the provision of tools to manage their payments and liquidity (see section A.4). Furthermore, RITS's membership requirements aim to reduce the probability that a member experiences an operational or financial problem that could disrupt the flow of liquidity in the system (see Principle 18).
7.2 A payment system should have effective operational and analytical tools to identify, measure, and monitor its funding flows on an ongoing and timely basis, including its use of intraday liquidity.
Since RITS does not assume liquidity risk, there are no relevant funding flows for RITS to measure and monitor. In managing operational risk, the Bank's operational staff continuously monitor the flow of liquidity and payments at both a system and member level for evidence of any disruption to the flow of liquidity, which could occur if a member experienced an operational or financial problem (see Principle 17). If such a disruption were observed, the Bank would liaise with members to mitigate the impact. To further mitigate possible disruption under such a scenario, members are required to inform the Bank in the event of any operational problem, and the RITS Regulations also set out actions that the Bank may take in response to a member default (see Principle 13).
7.3 A payment system, including one employing a deferred net settlement (DNS) mechanism, should maintain sufficient liquid resources in all relevant currencies to effect same-day settlement and, where appropriate, intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.
Since the Bank does not assume liquidity risk as operator of RITS, the requirement to maintain liquid resources to cover payment obligations in stressed scenarios does not apply.
7.5 For the purpose of meeting its minimum liquid resource requirement, a payment system's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If a payment system has access to routine credit at the central bank of issue, the payment system may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.
Since the Bank does not assume liquidity risk as operator of RITS, the minimum liquid resource requirement does not apply.
7.6 A payment system may supplement its qualifying liquid resources with other forms of liquid resources. If the payment system does so, then these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if a payment system does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. A payment system should not assume the availability of emergency central bank credit as a part of its liquidity plan.
Since the Bank does not assume liquidity risk as operator of RITS, the need to supplement its qualifying liquid resources does not apply.
7.7 A payment system should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the payment system or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. A payment system should regularly test its procedures for accessing its liquid resources at a liquidity provider.
7.8 A payment system with access to central bank accounts, payment services, or securities services should use these services, where practical, to enhance its management of liquidity risk.
Since the Bank does not assume liquidity risk as the operator of RITS, the requirement to use central bank accounts, payment services or securities services does not apply.
7.9 A payment system should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. A payment system should have clear procedures to report the results of its stress tests to appropriate decision makers at the payment system and to use these results to evaluate the adequacy of and adjust its liquidity risk management framework. In conducting stress testing, a payment system should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the payment system, include all entities that might pose material liquidity risks to the payment system (such as settlement banks, nostro agents, custodian banks, liquidity providers, and linked FMIs), and where appropriate, cover a multiday period. In all cases, a payment system should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.
7.10 A payment system should establish explicit rules and procedures that enable the payment system to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the payment system's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
The RITS Regulations set out actions that may be taken in RITS in the event of a member default (see Principle 13). Since the Bank does not assume liquidity risk as operator of RITS, the requirement to establish rules and procedures to address unforeseen and potentially uncovered liquidity shortfalls and replenish any liquid resources does not apply.
8. Settlement Finality
A payment system should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a payment system should provide final settlement intraday or in real time.
8.1 A payment system's rules and procedures should clearly define the point at which settlement is final.
The settlement of a payment in RITS is final and irrevocable when the ESAs of the paying and receiving RITS members are simultaneously debited and credited.[66] The point of settlement is clearly defined in Clause 16 of the RITS Regulations. As explained under Key Consideration 1.1, this is further protected by the approval of RITS as an RTGS system under Part 2 of the PSNA.
8.2 A payment system should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. A large-value payment system should consider adopting RTGS or multiple-batch processing during the settlement day.
Wholesale RTGS payments in RITS are settled individually in real time. Although settlements occur in real time, a wholesale RTGS payment submitted to the System Queue may remain there if the payer chooses not to settle the transaction (e.g. if the payer has set the status of the transaction to ‘deferred’) or has insufficient funds. Any wholesale RTGS payments that are not settled at the end of the last session during which the transaction was eligible for settlement are automatically removed from RITS but may be resubmitted for settlement when the system reopens (for more information on RITS session times refer to Appendix A, section A.6).
8.3 An FMI should clearly define the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant.
Under Clause 13.2 of the RITS Regulations, a member can unilaterally revoke its outgoing wholesale RTGS payments sent to the System Queue at any time prior to settlement. RITS cash transfers can be revoked via the RITS User Interface, while payments sent via a feeder system must be revoked via that feeder system.
9. Money Settlements
A payment system should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a payment system should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.
9.1 A payment system should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.
Money settlements in RITS are conducted in central bank money. Payment obligations in RITS are settled on an RTGS basis across ESAs at the Bank.
9.2 If central bank money is not used, a payment system should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.
Money settlements in RITS are conducted using central bank money.
9.3 If a payment system settles in commercial bank money, it should monitor, manage, and limit its credit and liquidity risks arising from the commercial settlement banks. In particular, a payment system should establish and monitor adherence to strict criteria for its settlement banks that take account of, among other things, their regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability. A payment system should also monitor and manage the concentration of credit and liquidity exposures to its commercial settlement banks.
9.4 If a payment system conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.
Money settlements in RITS are conducted using central bank money across the books of the Bank. The Bank's credit and liquidity risks from the operation and provision of liquidity in RITS are strictly controlled, as described in Principles 4 and 7.
9.5 A payment system's legal agreements with any settlement banks should state clearly when transfers on the books of individual settlement banks are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the payment system and its participants to manage credit and liquidity risks.
The Bank does not use commercial bank money settlement agents in the operation of RITS.
12. Exchange-of-Value Settlements
If a payment system settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.
RITS is not an exchange-of-value settlement system. It does not perform the settlement of foreign exchange transactions or securities transactions. RITS does, however, facilitate the settlement of linked securities, foreign exchange and property transactions in other systems, assisting market participants in eliminating principal risk. In particular, RITS settles the interbank obligations arising from the cash leg of delivery-versus-payment debt and equity security transactions in Austraclear and ASX Settlement, respectively.[67] RITS is also used to fund the Australian dollar leg of foreign exchange transactions settled on a payment-versus-payment basis in CLS's Settlement and CLSClearedFX services.[68] RITS also facilitates the financial settlement of property transactions originating from separate systems operated by PEXA and ASX Financial Settlements Pty Limited such that the lodgement of the title transfer only occurs once settlement has been assured by the reservation of funds in ESAs.
13. Participant-Default Rules and Procedures
A payment system should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the payment system can take timely action to contain losses and liquidity pressures and continue to meet its obligations.
Note: Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, this Principle should not constrain the Bank's policies on maintaining financial stability including when managing participant defaults.
13.1 A payment system should have default rules and procedures that enable the payment system to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default.
The RITS Regulations set out actions taken in RITS in the event of a member default. A member that becomes aware of an insolvency event – either its own insolvency, or the insolvency of another member for which it acts as a settlement agent – must notify the Bank immediately. The Bank may then suspend the relevant member, at which point the Bank will remove any queued payments to and from the member, and prevent the input of any new payments involving the suspended member. The Bank may also suspend a member that is unable to meet its settlement obligations. By permitting swift and decisive action in this way, the RITS Regulations allow the Bank to minimise the potential for a member default to disrupt settlement in the system more widely.
As explained under Principle 4, in the event of a member default the Bank would not be exposed to a loss in its role as operator of RITS. Accordingly, the RITS Regulations do not cover replenishment of financial resources following a member default.
13.2 A payment system should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules.
The Bank has internal procedures that document the steps it would take in response to an insolvency event. These procedures outline the roles and responsibilities of management for each decision that must be taken after such an event, which persons should be consulted when taking each decision, and which persons should be advised of a decision.
The procedures also set out which other regulatory agencies, Australian industry bodies and FMIs should be contacted if a member is or may be suspended from RITS, and the methods available for communication with these parties. The procedures are tested and updated on a periodic basis.
13.3 A payment system should publicly disclose key aspects of its default rules and procedures.
The key aspects of the default management rules and procedures are set out in the RITS Regulations, which are publicly available on the Bank's website.
13.4 A payment system should involve its participants and other stakeholders in the testing and review of the payment system's default procedures, including any close-out procedures. Such testing and review should be conducted at least annually or following material changes to the rules and procedures to ensure that they are practical and effective.
Since RITS default management procedures do not require members to perform any actions, members are not involved in the testing or review of these procedures.
15. General Business Risk
A payment system should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.
Note: Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, the requirement to hold ring-fenced liquid net assets funded by equity to cover business risk and support a recovery or wind-down plan (Key Considerations 15.2 – 15.4) does not apply to the Bank, given its inherent financial soundness. Similarly, the requirement to maintain a plan to raise additional equity (Key Consideration 15.5) does not apply.
15.1 A payment system should have robust management and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses.
As set out under Key Consideration 2.6, the Bank takes a coordinated approach to identifying, assessing and managing risk at both an enterprise and business level. A key component of the Bank's framework for managing general business risk is its budgeting and accounting processes, which allow it to monitor, manage and control its operating expenses, including those arising from the operation of RITS. The Bank's financial accounts are also subject to audit by the Australian National Audit Office. Audit reports are reviewed by the Audit Committee.
The Bank's financial target with respect to RITS is to recover its operating costs over the medium term. This gives the Bank some flexibility over the timing of fee changes and allows it to provide greater price stability to members. The fee structure is reviewed annually, although not every review results in changes to the fees. Fees for wholesale RTGS transactions are based on a combination of the value and volume of settled transactions. The use of value fees recognises that the benefit derived from wholesale RTGS settlement is a function of the value settled.
The most recent fee review resulted in RITS value and volume fees increasing from July 2019. These changes primarily reflect increases in information technology operating costs as the Bank undertakes a major upgrade of its RITS infrastructure, with the aim of ensuring that RITS availability and resilience is maintained at a level appropriate to its critical role in the payments system. Annual membership, Automated Information Facility (AIF), and FSS fees remained unchanged.[69]
For significant improvements to RITS functionality, the Bank absorbs the initial capital and development costs as a policy-related expense. Such projects must be approved by the Bank's Investment Committee and relevant financial analysis is included as part of the business case approval process. Ongoing operational costs and system lifecycle replacement costs are recovered.
In addition, the Bank has an ongoing program to evaluate fraud risks and review its fraud control framework (see Key Consideration 17.1).
16. Custody and Investment Risks
A payment system should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A systemically important payment system's investments should be in instruments with minimal credit, market, and liquidity risks.
Note: Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, this Principle should not constrain the Bank's policies on investment strategy (including that for reserve management) or impose requirements regarding the disclosure of that strategy.
16.1 A payment system should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets.
The Bank does not hold RITS member's assets as part of its role as operator of RITS. However, the Bank does do so as part of its provision of liquidity to approved RITS members. Eligible securities purchased by the Bank as collateral under repo (for payment system purposes and OMO, as well as the TFF and US swap line established in March 2020) must be denominated in Australian dollars and lodged in Austraclear (see Principle 5). Austraclear is a licensed clearing and settlement facility and is therefore overseen by the Australian Securities and Investments Commission (ASIC) and the Bank. In accordance with the licensing regime, Austraclear must meet the Bank's SSF Standards, which are aligned with the Principles. The SSF Standards require that Austraclear maintain robust accounting practices, safekeeping procedures and internal controls that fully protect the assets for which it acts as a central securities depository.
The Bank does not use custodian banks to hold the collateral it purchases in providing liquidity to eligible RITS members, or hold Australian dollar-denominated collateral with entities in other time zones or foreign legal jurisdictions.
16.2 A payment system should have prompt access to its assets and the assets provided by participants, when required.
Approved RITS members are bound by the RITS Regulations, which include an amended and supplemented version of the SIFMA/ICMA GMRA (2011 version) legal contract governing the terms and conditions of repos with the Bank. The close-out netting provisions included in the Bank's repo agreements with counterparties provide for the Bank to close out or terminate the second leg of a repo immediately. This right is protected by Part 4 of the PSNA (see Principle 1).
The Austraclear system is subject to high operational resilience standards and operates in the same time zone as RITS, and whose operating hours are broadly aligned with those of RITS. The Bank would therefore expect to have prompt access to the securities it holds as collateral. In particular, the Bank has a service agreement with ASX Limited – the owner of Austraclear – that imposes strict operational requirements on the Austraclear system, including a requirement to provide a minimum 99.9 per cent availability during business hours. The Austraclear system must also adhere to similar high standards of security and operational reliability set out in the SSF Standards.[70]
RITS members have the option to use ASX Collateral services to deliver a subset of eligible securities under certain types of repo (see Principle 5). Securities provided to the Bank under repo through ASX Collateral are held in special-purpose ‘collateral accounts’ in Austraclear. Securities in these accounts can only be transferred based on instructions from ASX Collateral. For this reason, the Bank relies on the availability of ASX Collateral to be able to promptly access the securities held in the Bank's collateral accounts and, in the case of a default of the repo counterparty, liquidate those securities in a timely manner. The operational resilience of ASX Collateral is addressed in Key Consideration 17.7.
16.3 A payment system should evaluate and understand its exposures to its custodian banks, taking into account the full scope of its relationships with each.
The Bank does not use custodian banks to hold the collateral it receives in providing liquidity to eligible RITS members.
16.4 A payment system's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.
The Bank publishes criteria for securities eligible for domestic operations on its website. Eligibility criteria take into account the creditworthiness of the issuers and the Bank applies conservative haircuts on all collateral securities purchased under repo (see Key Consideration 5.2). The legal contract governing the repo transactions give the Bank full title to the purchased securities and the close out netting provisions enable the Bank to terminate the repo contract, value and liquidate the securities upon notice of default.
The Bank does not re-use collateral purchased under repo and therefore does not face investment risks associated with returning re-used securities on the unwind date of repos.
17. Operational Risk
A payment system should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the payment system's obligations, including in the event of a wide-scale or major disruption.
Rating: Broadly observed
17.1 A payment system should establish a robust operational risk-management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks.
The Bank has established a robust operational risk management framework, with systems, policies and procedures to identify, monitor and manage operational risk. Under the risk management framework, Payments Settlements Department is required to identify the range of risks that might impact its ability to operate RITS in a safe and efficient manner. To identify operational risks, the Bank applies both a historical approach, drawing lessons from issues that have occurred in the past, and a theoretical approach whereby experienced staff members seek to identify possible additional sources of risk. For each operational risk identified, Payments Settlements Department assesses the probability of the operational risk crystallising and its potential impact. Controls and mitigation strategies are also considered. Operational controls are documented in procedure manuals, administration guides and daily checklists. These controls and contingency plans are reviewed and signed off by management annually, or when system changes or upgrades are planned.
The operational risk management framework supporting RITS is benchmarked against relevant domestic and international standards, including:
Business Continuity – Managing Disruption-related Risk (AS/NZS 5050-2010)
Fraud and Corruption Control (AS 8001-2008)
Whistleblower Protection Programs for Entities (AS 8004-2003).
The Bank has a change management policy, supported by detailed processes and procedures, to safeguard the integrity and reliability of RITS. The policy is aligned to standards that are considered best practice in the information technology and finance industries, including:
Information Technology Infrastructure Library, Version 3
ISO Standard 20000: IT Service Management.
Under the policy, any material change typically requires the responsible business area to prepare a change implementation plan, which would identify possible risks arising from the change and controls in place to mitigate those risks. These controls would normally include plans to ‘back out’ any change that had been implemented, should this be necessary. Changes assessed as posing a high or medium risk are presented for approval to the Change Advisory Board, which comprises senior management from operational and information technology areas in the Bank.
To ensure that changes do not disrupt the operation of RITS, major or high-risk changes are implemented outside of core operating hours. Changes to the FSS, which operates continuously, are managed using component isolation or upgrades to one site at a time. Backups of data and system configurations are made as appropriate before the implementation of any major changes. Any system changes are subject to extensive testing in separate test environments before approval for live implementation. This includes, as applicable, connectivity, functional, performance and failover testing. RITS members are given the opportunity to become familiar with new functionality in an industry test environment before live implementation.
The Bank has an enterprise-wide project management framework. This framework includes guidance to ensure internal consistency in the way project risks are managed, as well as the arrangements for governing a project. The framework is broadly aligned to widely used industry best practice, including the PRINCE2 framework. The framework is supported by the Enterprise Project Management Office (EPMO). The EPMO provides analysis, including on risk, and status reports to the Bank's executives on major initiatives. It also provides advice and support to Bank staff working on projects.
The resourcing of the areas in Payments Settlements Department involved in the operation of RITS is the responsibility of the senior management in those areas. Recruitment and selection at the Bank is based on the principles of being merit-based, fair, objective and open, and consistent with diversity and inclusion. New staff are required to undergo training in a range of areas, including anti-money laundering, information security, workplace health and safety, acceptable use of technology, fraud awareness and the Bank's Code of Conduct. Staff rotations and cross-training in critical areas ensure that critical functions are not dependent on particular individuals. The Bank also has succession planning processes in place for key staff. Additional staff resources have been put in place to ensure 24/7 support of RITS and FSS since the launch of the latter.
Payments Settlements Department relies on the Bank's Information Technology Department to provide technical support for RITS. To ensure there is a common understanding, the level of service expected from Information Technology Department with regard to the support of RITS is set out in internal documents. The resourcing policies set out above also apply to Information Technology Department.
The Bank has an ongoing program to evaluate fraud risks and review its fraud control framework. This is documented in the Fraud Control Policy. The primary preventative fraud controls include audit logs, dual input checks, separation of duties, management sign-off and processing checklists. These controls are supported by reconciliations and reviews by management. Regular staff training in fraud awareness is also conducted and monitored to ensure that all staff are actively engaged in fraud prevention. The Bank operates a hotline for staff, through which suspicious behaviour can be reported anonymously. Audit Department investigates the potential for fraud and fraud controls as part of its regular audits.
17.2 A payment system's board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the payment system's operational risk management framework. Systems, operational policies, procedures, and controls should be reviewed, audited, and tested periodically and after significant changes.
The Bank manages the operational risks arising from RITS through its risk management framework, the governance of which is set out under Key Consideration 2.6. Under this framework, operational risk policies are developed and approved by the senior management of Payments Settlements Department, with oversight from the Risk Management Committee. In some circumstances, policies would need to be approved by the Assistant Governor (Business Services). Operational policies, procedures and controls in respect of RITS are subject to audit by the Audit Department, with assistance from external consultants. Audit reports are reviewed by the Audit Committee, with copies provided to the Risk Management Committee.
The systems, policies, procedures and controls that are part of the operational risk framework are tested periodically (see Key Considerations 17.4–17.7 for further details).
17.3 A payment system should have clearly defined operational reliability objectives and should have policies in place that are designed to achieve those objectives.
RITS availability targets are clearly defined and documented. The target availability for RITS is at least 99.95 per cent, calculated on an annual basis. Availability is measured relative to the total number of hours that the system is normally open for settlement (see Appendix A.2). Performance against the annual availability target for RITS is reported to the Bank's Executive Committee and senior management in Payments Settlements Department on a quarterly basis.
The Bank has established arrangements to ensure that RITS meets its target availability, including a detailed business continuity policy (see Key Consideration 17.6) and change management framework (see Key Consideration 17.1). In addition, Payments Settlements Department applies a number of controls to prevent or manage disruptions, including operating procedure manuals, dual input checks and the use of checklists.
Both RITS and the FSS are monitored on a continuous basis. The Bank also monitors RITS components to ensure that any issues are detected in a timely manner. The monitoring of RITS aims to detect system problems immediately. Automated tools are used, which verify the operation of system components in intervals as short as one minute, and provide automatically generated email alerts to relevant Bank staff if any issues are detected. The Bank continuously monitors the flow of liquidity and payments at both a system and member level for evidence of any disruption to the flow of liquidity, which could occur if a member experiences an operational or financial problem. Alerts are also generated where unexpectedly high ESA balances indicate potential liquidity issues.
17.4 A payment system should ensure that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service-level objectives.
The Bank has processes and controls in place to ensure that RITS has sufficient capacity. RITS capacity targets for wholesale RTGS transactions include a:
processing throughput target – that is, that RITS should be able to process peak-day transactions in less than two hours (assuming no liquidity constraints)
projected capacity target – that is, RITS should be able to accommodate projected volumes 18 months in advance with 20 per cent headroom.
RITS is tested regularly to ensure that it meets these targets. Test results are reviewed by management in Payments Settlements Department. In the event of an issue, the Bank would investigate options to either improve processing throughput or increase capacity.
Testing is complemented by monitoring and alerting systems, which are designed to automatically advise operational staff if volumes begin to approach operational capacity for various RITS components.
17.5 A payment system should have comprehensive physical and information security policies that address all potential vulnerabilities and threats.
At the Bank, cyber resilience – in relation to both RITS and the Bank's operations more broadly – is overseen by the Risk Management Committee as part of the Bank's enterprise-wide risk management framework. As noted in the Bank's Risk Appetite Statement, the Bank has a very low appetite for risk of compromise to Bank assets arising from cyber threats. To address this risk, the Bank adopts and continually updates strong internal controls and robust technology solutions.
Information Technology Department, in conjunction with Payments Settlements Department, is responsible for the review and implementation of the information security policies applicable to RITS. To support the Bank's information security, there is a dedicated Information Technology Security Team within the Information Technology Department that is headed by the Bank's Chief Information Security Officer. Information security policies are aligned to the Australian Government's Protective Security Policy Framework.[71] Cyber security practices are informed by domestic and international best practice, including the Australian Signals Directorate's Strategies to Mitigate Cyber Security Incidents. The Bank's payment systems are certified annually against the ISO27001 information security standard. Information security policies are reviewed annually and include consideration of changes to either the nature of the risk or the assets being protected. Security reviews by external consultants are also routinely commissioned for new RITS components and in response to significant changes to the RITS system or security environment.
The Bank recognises that the nature of cyber-related issues and industry best practice are rapidly evolving, and that cyber resilience requires ongoing effort. In 2016 the Bank completed a project to review RITS's cyber resilience arrangements and determined a set of additional measures to be put in place. The highest priority recommendations were addressed in early 2017 and the remaining lower priority recommendations were completed in 2018. The Bank continues to improve its cyber resilience via ongoing related projects.
As a user of the SWIFT messaging network, the Bank is required to meet security standards established by SWIFT, including the SWIFT CSCF that was launched in 2017. The CSCF provides a baseline security standard for the SWIFT network and all customers are required to annually attest to their compliance with these controls. The Bank has attested to full compliance with all mandatory controls in the 2019 version of the standards, which included three new controls.
Facilities Management Department administers the Bank's physical security policy, which complies with the Protective Security Policy Framework set by the Australian Government. Under the policy, security risks are identified and controls implemented to mitigate these risks. The Bank maintains a number of controls to limit physical access to sensitive areas.
17.6 A payment system should have a business continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology systems can resume operations within two hours following disruptive events. The plan should be designed to enable the payment system to complete settlement by the end of the day of the disruption, even in case of extreme circumstances. The payment system should regularly test these arrangements.
The Bank maintains detailed business continuity plans. These set out the operational response to events that could disrupt the operation of RITS. These plans cover lines of authority, means of communications and failover procedures, and are updated annually or more frequently if required e.g. when there is a major change to RITS.
A primary control to reduce the impact of a contingency event is a high degree of redundancy in RITS systems. RITS data are synchronously mirrored at two geographically remote sites, which are permanently staffed. Full redundancy of equipment required for the settlement of RITS transactions exists at both these sites. RITS can be operated from either site indefinitely. Live operations alternate between both sites on a regular basis. Critical staff are also able to work from home through remote logon using a virtual private network. For RITS, the recovery time target (the time taken between confirmed system failure at one site and resumption at the alternate site) is up to 40 minutes, depending on the nature of the operational disruption.
This level of redundancy is complemented by internal plans to deal with a wide variety of potential disruptions. These potential disruptions include the failure of individual RITS components and wide-scale external disruptions, such as floods and pandemics. Target recovery times are documented for each scenario. Contingency procedures are reviewed at regular intervals, and after major system changes and testing (if required).
The Bank has continued to implement additional enhanced monitoring and alerting capabilities to identify cyber attacks, as well as enhanced systems and processes that would enable timely and accurate recovery of data following a breach. The Bank had already developed plans to improve the capability of RITS to meet the two-hour recovery time objective in the context of a cyber attack, which met expectations established by CPMI and IOSCO in their 2016 Cyber Resilience Guidance. The Bank is also continuing to evaluate current and emerging technology that could further enhance its ability to recover from cyber attacks in a timely manner.
Payment Settlements Department's plans include arrangements for the provision of timely information to stakeholders, including RITS members and operators of interdependent systems. A web-based crisis communication facility for RITS enables the Bank to efficiently disseminate information via email and SMS to a large number of stakeholders. The crisis communication facility is configured to include predefined notification lists of both internal and external parties. This facility is externally hosted, does not rely on any Bank infrastructure and can be accessed remotely if required. Conference call facilities are also available to enable timely discussion between key stakeholders.
Payment Settlements Department also has documented procedures and processes for managing a contingency, which includes instructions for assigning roles and responsibility during a contingency. Contingency testing occurs regularly to ensure that the contingency procedures are robust and remain effective. In addition, Payments Settlements Department staff who are based at the Bank's head office are required to work at the Bank's geographically remote second site during a designated week each year to ensure that they are familiar with the facility and that the alternate site's systems continue to work as expected.
Even if there is an extreme event in which RITS was unavailable and recovery was not possible, transactions from the SWIFT PDS and Austraclear feeder systems, which account for the majority of value and volume of wholesale RTGS transactions settled in RITS, can be settled using ‘contingency settlement arrangements’. These arrangements involve the deferred net settlement of interbank obligations arising from the two feeder systems in a multilateral batch in RITS on the following day.
17.7 A payment system should identify, monitor, and manage the risks that key participants, other FMIs, and service and utility providers might pose to its operations. In addition, a payment system should identify, monitor, and manage the risks its operations might pose to other FMIs.
Recognising that the efficient operation of RITS is also dependent on the operational reliability and resilience of its members, the Bank must be notified immediately of any problem affecting a member's transaction activity. The Bank also monitors members' payment flows in real time. If a potential problem is detected, the Bank will contact that member for further information. After a disruption, a member is required to provide the Bank with a detailed incident report on the causes and remedial actions of the disruption. In addition, the Bank has developed its Business Continuity Standards for RITS members, which aim to promote high availability in RITS payments processing operations, requiring both resilience of system components and rapid recovery if failover to alternative systems is required.
The Bank monitors RITS members' compliance with the standards on an ongoing basis. The Bank has received reporting members' latest annual self-certification statements against the standards as at the end of 2019, at which time 63 RITS members self-certified, with 17 partly compliant with the standards. Where members are partly or non-compliant, the Bank asks members to provide a timetable to achieve compliance and follows up progress with members. As part of the February 2020 annual attestation, for the 2019 compliance year, the standards required reporting members to provide the Bank with access to view relevant attestations made to SWIFT as specified by the SWIFT CSCF. In May 2018 the CPMI published a high-level strategy for reducing the risk of wholesale payments fraud related to endpoint security. The CPMI also provides guidance on the operationalisation of the strategy (for further details, refer to section 3.1.3). In response to this, Payments Settlements Department has commenced an assessment of the endpoint security arrangements for RITS and the potential areas for improvement, and has been promoting the strategy to RITS members, particularly through its RITS User Group forums.
Service and utility providers
SWIFT has been identified as a critical service provider to RITS, as the failure of SWIFT would severely impair the ability of members to effect third-party payments, as well as the management of Austraclear settlements via the RITS AIF (which uses SWIFT messaging). The Bank has a premium support package from SWIFT, the terms of which set out the response times and level of support expected from SWIFT should an issue arise. The Bank also liaises regularly with SWIFT and participates in a coordinated global outage test, which simulates an operational disruption at SWIFT. The resilience and reliability of SWIFT is supported by regulation and oversight by the SWIFT Oversight Group, comprising the G10 central banks and chaired by the National Bank of Belgium.[72] To support its oversight activities, the Oversight Group has set proprietary minimum standards – the High Level Expectations – against which SWIFT is assessed.
To address the risks to RITS from critical dependencies on utility providers, the Bank has put in place a number of controls:
Each operational site has an uninterruptable power supply and a backup power generator system; the Bank performs regular testing of backup arrangements.
The majority of the external communications links to data centres are via diverse paths.
Other FMIs
Austraclear has been identified as an FMI that is of critical importance to the operation of RITS. The contractual agreement with ASX Limited – the owner of Austraclear – imposes strict service operational requirements on the Austraclear system, including requiring the Austraclear system to provide a minimum 99.9 per cent availability during business hours. The agreement also requires the Austraclear system to conduct connectivity testing with RITS annually.
The Bank also monitors the interdependencies between Austraclear and ASX Collateral. While ASX Collateral is not itself subject to direct regulation as an FMI, the Bank's SSF Standards set requirements for Austraclear to maintain equivalent resilience standards for critical interdependent systems.[73] Accordingly, in its assessment of Austraclear against the SSF Standards, the Bank has sought to establish that the standards for operational resilience at ASX Collateral (including the link with Clearstream) are consistent with those that apply to Austraclear.[74] The availability of ASX Collateral is also relevant to the Bank's ability to promptly access securities held through ASX Collateral (see Key Consideration 16.2).
Austraclear and CLS rely on RITS to settle Australian dollar-denominated wholesale RTGS transactions, and their operations would be disrupted if RITS was not available. This risk is mitigated by ensuring the operational reliability and resilience of RITS. The Bank also conducts joint contingency testing with ASX (the operator of Austraclear) and CLS. In addition, ASX has contingency plans that contemplate Austraclear continuing to operate independently of RITS. These plans allow for the interbank settlement of funds to be effected using contingency settlement arrangements (see Key Consideration 17.6).
18. Access and Participation Requirements
A payment system should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.
Note: Consistent with the CPMI-IOSCO guidance on the Application of the Principles to Central Bank FMIs, this Principle should not constrain the Bank's policy on whom it is prepared to offer accounts and on what terms.
18.1 A payment system should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.
Since settlement in RITS occurs using central bank money, only an institution with an ESA at the Bank can be a settlement participant in RITS. Furthermore, since RITS is the only means of access to ESAs, all ESA holders must be members of RITS and meet all of its operating conditions. The eligibility criteria for ESA holders therefore effectively represent the eligibility criteria for settlement participants in RITS. Policy around ESA eligibility is set by the Bank's Executive Committee and is available on the Bank's website. The ESA eligibility policy has been designed to be fair and open and enhance competition in the provision of payment services by allowing providers of third-party payment services access, irrespective of their institutional status. ADIs are eligible by default, because these institutions are assumed to provide third-party payment services as part of their business.
Australian-licensed CCPs and SSFs (or a related body corporate acceptable to the Bank) with payment arrangements that require Australian dollar settlement are also eligible to hold an ESA.
An applicant for an ESA must also demonstrate that it meets certain risk-related participation requirements at the time of application, including that:
it has the financial resources and skills consistent with its actual and anticipated payments business and resulting settlement obligations
it has the operational capacity to operate and manage its ESA
it has appropriate liquidity arrangements to settle obligations arising from its payment services, including access to adequate ESA liquidity to meet routine and peak settlement obligations, access to adequate intraday ESA liquidity to settle obligations in a timely manner any collateral or guarantees it relies upon (especially in times of unpredictable stress) are adequate to meet its obligations
it has appropriate business continuity arrangements
it has an adequate understanding of the impacts that its operational, liquidity management and business continuity arrangements have on other RITS members
it has a sufficiently developed risk culture in its business and operations, including processes around developing and maintaining key policies, appropriate reporting lines, and the ability to meet corporate governance requirements for RITS members.
In respect of the requirements for operational capacity, liquidity arrangements and business continuity arrangements, applicants are also required to have an adequate understanding of the requirements and competence in designing and implementing the necessary arrangements.
As part of the application process, the Bank may choose to commission a report relating to aspects of the applicant's conduct and standing, including of the applicant itself, its directors, key management personnel, shareholders and other related entities. The Bank may also require the applicant to obtain a report from an independent expert assessing the applicant's policies and procedures related to sanctions and anti-money laundering and counter-terrorism financing (AML/CTF) and the applicant's compliance with sanctions and AML/CTF legislation and other regulatory requirements.
To ensure that the institution is always able to authorise, execute and settle RTGS transactions in an efficient and timely manner, the Bank requires that, for institutions settling transactions using their own ESA, responsibility for the ESA must rest with management located in Australia. ESA holders must also meet the Business Continuity Standards set by the Bank (see Key Consideration 17.7).
The Bank reserves the right to impose additional operational or other requirements on ESA holders at its discretion. In particular, an institution that is not supervised by APRA (i.e. not an ADI) or that has limited access to liquid assets, and that has deferred net settlement or time-critical payment obligations, may need to meet additional liquidity requirements on an ongoing basis.
18.2 A payment system's participation requirements should be justified in terms of the safety and efficiency of the payment system and the markets it serves, be tailored to and commensurate with the payment system's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, a payment system should endeavour to set requirements that have the least-restrictive impact on access that circumstances permit.
RITS participation requirements are designed to reduce the likelihood that an individual member experiences an operational or financial problem that disrupts the system more broadly, for instance by defaulting, becoming a liquidity sink or excessively delaying payments.[75] The requirements are generally proportional to members' expected wholesale payments in RITS. For example, the Business Continuity Standards are proportional to the nature and size of a prospective member's payments business.
To reduce the operational burden on smaller RITS members, an ADI with aggregate outgoing wholesale RTGS transactions of less than 0.25 per cent of the total value of wholesale RTGS transactions, may use an agent to settle some or all of its wholesale RTGS transactions, rather than settling directly across its own ESA (see Principle 19). An ADI that settles all of its RTGS transactions through an agent may apply to hold a ‘dormant’ ESA for use in an extreme contingency where the availability or effectiveness of the RTGS services provided by its agent are compromised.
Indirect participation in RITS is not available more broadly because of the concern that it might lead to a high degree of concentration of wholesale RTGS transactions through a few direct participants, and give rise to an unacceptable concentration of liquidity and operational risks in these members (see Principle 19). Indirect participation also introduces credit risk for members because settlement between an indirect participant and its settlement agent occurs in commercial bank money.
18.3 A payment system should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.
The Bank closely monitors member activity in RITS, to ensure that members are demonstrating that they have the operational capacity and sufficient liquidity to manage their payments activity on an ongoing basis (see Key Consideration 17.7). RITS direct participants are also required to self-certify their compliance with the Business Continuity Standards annually. In addition, the majority of RITS members – ADIs, CCPs and SSFs – are subject to ongoing regulation, supervision and oversight by either APRA, or ASIC and the Bank, including with respect to operational and liquidity requirements. Where RITS members, as ESA holders, are subject to additional operational or other requirements, evidence of their compliance with these requirements must be provided periodically to the Bank.
The RITS Regulations clearly set out the conditions under which the Bank can suspend a member. Accompanying procedures are designed to facilitate an orderly exit. The 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. The Bank may at any time suspend with immediate effect any member, for such a period as it considers appropriate, if it believes:
the member is insolvent;
the member has not complied with any obligations under the membership agreement or any representation made by the member is not true at any time;
the member's conduct or continued participation is contrary to the interests of the members, the RBA or RITS;
the member has or will have insufficient funds for settlements; or
it has lost the authority to debit or credit the member's ESA or receive or give effect to transactions.
To facilitate an orderly exit, unsettled payments to or from a suspended member would be removed from the RITS queue, and the input of any new payments involving the suspended member would be prevented. In the case of the suspension of a batch administrator, all payments in any unsettled batch would be removed from the RITS queue (see Principle 13).
19. Tiered Participation Arrangements
A payment system should identify, monitor and manage the material risks to the payment system arising from tiered participation arrangements.
19.1 A payment system should ensure that its rules, procedures, and agreements allow it to gather basic information about indirect participation in order to identify, monitor, and manage any material risks to the payment system arising from such tiered participation arrangements.
The Bank's ESA policy limits the scope for material risks to arise from tiered participation arrangements (see Principle 18). In particular, the Bank's ESA policy limits indirect participation by ADIs, which are the primary providers of payment services in Australia, to those with aggregate wholesale RTGS transactions of less than 0.25 per cent of the total value of wholesale RITS RTGS transactions. Payments settled on an RTGS basis through the FSS are not included in the calculation of the 0.25 per cent threshold.
Agent banks are required to report the value and volume of the incoming and outgoing wholesale RTGS payments settled on behalf of their client ADIs to the Bank on a quarterly basis. ESA holders that participate indirectly must also notify the Bank if they change the agent bank through which they settle. This information is used to monitor compliance with the 0.25 per cent threshold. If the value of an ADI's outgoing wholesale RTGS payments consistently exceeded the 0.25 per cent threshold, the Bank would consider revoking approval for the agency arrangement. If revoked, the ADI would be required to settle payments using its own ESA.
As noted under Principle 18, the ESA policy also minimises the scope for risks arising from indirect participation by CCPs and SSFs. The Bank requires:
any Australian-licensed CCP that the Bank has determined to be systemically important in Australia to 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 acceptable to the Bank
any Australian-licensed SSF that the Bank has determined to be systemically important in Australia, and that faces Australian dollar liquidity risk from securities settlement-related activities, to hold an ESA in its own name, or that of a related body corporate acceptable to the Bank, in order to manage its Australian dollar liquidity. The Bank's SSF Standards also require that an SSF conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks. Together, these requirements mean that Australian-licensed SSFs with payment arrangements that require Australian dollar settlement settle such obligations in RITS.
19.2 A payment system should identify material dependencies between direct and indirect participants that might affect the payment system.
Taken in combination, the requirements described in Key Consideration 19.1 mitigate the risk of material dependencies developing between direct and indirect participants that could affect RITS.
The Bank considers it unlikely that there are material dependencies that could affect RITS between RITS members that are indirect participants that are not required to hold ESAs, and RITS members that are direct RITS participants. To enhance its visibility of indirect flows through RITS, the Bank collects information about indirect wholesale RTGS payment flows from RITS members that act as settlement agents for indirect participants.
19.3 A payment system should identify indirect participants responsible for a significant proportion of transactions processed by the payment system and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the payment system in order to manage the risks arising from these transactions.
Given that the value of an indirect participant's wholesale RTGS payments must be less than 0.25 per cent of total wholesale RTGS payments, it is unlikely that such a participant would be large relative to the direct participant it uses as an agent. The design of RITS also encourages direct participation by reducing the liquidity required for direct participation through liquidity-saving features, which are described in Appendix A, section A.4.
19.4 A payment system should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.
The Bank monitors compliance with its ESA policy, which mitigates the potential for risks to arise from tiered participation arrangements, on an ongoing basis. The Bank also reserves the right to review the ESA policy as necessary.
21. Efficiency and Effectiveness
A payment system should be efficient and effective in meeting the requirements of its participants and the markets it serves.
21.1 A payment system should be designed to meet the needs of its participants and the markets it serves, in particular, with regard to choice of a clearing and settlement arrangement; operating structure; scope of products cleared, settled, or recorded; and use of technology and procedures.
The Bank holds RITS User Group forums in Sydney every six months. These forums provide an opportunity to discuss issues of strategic importance to RITS and its members. The Bank also liaises closely with the industry through AusPayNet and the Australian Financial Markets Association (AFMA). The Bank also consults with RITS members on strategic initiatives.
21.2 A payment system should have clearly defined goals and objectives that are measurable and achievable, such as in the areas of minimum service levels, risk management expectations, and business priorities.
The Bank's objectives in developing and operating RITS are clearly defined (see Key Consideration 2.1). The Bank sets goals relating to minimum service levels and risk management (see Key Consideration 17.3). A key business priority for RITS is to meet the changing needs of members in the payments system. The Bank communicates its business priorities for RITS through public consultation, RITS User Group forums, direct consultations with RITS members, and liaison with industry through AusPayNet and AFMA.
21.3 A payment system should have established mechanisms for the regular review of its efficiency and effectiveness.
The Bank has processes in place to ensure that RITS is operated in an efficient manner. These include regular internal audits of the functional areas involved in the operation of RITS, which are presented to the Bank's Audit Committee, and performance evaluations of Payments Settlements Department management against their position descriptions. A key metric for the review of the effectiveness of Payments Settlements Department is its operational performance. This is reported to the Bank's Executive Committee on a quarterly basis. Feedback from periodic liaison with stakeholders at RITS User Group forums and industry liaison through AusPayNet and AFMA are also key inputs into reviews of the effectiveness of RITS. The Bank also carries out ad-hoc reviews of and implements required upgrades to the technologies and internal business processes that support RITS to ensure the continued effectiveness of the system.
22. Communication Procedures and Standards
A payment system should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.
22.1 A payment system should use, or at a minimum accommodate, internationally accepted communication procedures and standards.
The majority of wholesale payment messages sent to RITS – by both volume and value – are sent using the internationally accepted SWIFT message standards and network.[76] Wholesale RTGS payment instructions can be submitted to RITS for settlement on the System Queue via two linked external feeder systems – SWIFT PDS and Austraclear – or entered into RITS directly.
Messages sent to RITS via the SWIFT PDS use SWIFT MT message standards and are transmitted over the SWIFT network.[77] The AIF, which members can use to access information on their payments, receipts and liquidity in real time, receive end-of-day ESA statements and submit commands to manage queued payments, also uses SWIFT message standards and is accessed via the SWIFT network.
The procedures and standards used to submit payments messages to Austraclear are determined by ASX.[78] Notwithstanding this, members can use the RITS User Interface or the AIF to control the status of payments sent via the Austraclear feeder system.
Wholesale interbank RTGS payments submitted to the System Queue can be manually entered directly into RITS using the RITS User Interface, which can also be used to perform enquiries, download reports and manage transactions. The RITS User Interface is a browser-based interface that can be accessed over the internet.
Messages sent to RITS via the NPP feeder system use ISO20022 message standards and are transmitted over the domestic SWIFT network.
23. Disclosure of Rules, Key Procedures and Market Data
A payment system should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the payment system. All relevant rules and key procedures should be publicly disclosed.
23.1 A payment system should adopt clear and comprehensive rules and procedures that are fully disclosed to participants. Relevant rules and key procedures should also be publicly disclosed.
The RITS Regulations and associated contractual arrangements are clear and comprehensive, and are available to the public on the Bank's website. The RITS Regulations are supplemented by information papers and user guides that explain RITS requirements and functions.
23.2 A payment system should disclose clear descriptions of the system's design and operations, as well as the payment system's and participants' rights and obligations, so that participants can assess the risks they would incur by participating in the payment system.
The Bank provides operationally active members with information papers and user guides that contain detailed descriptions of RITS's features and instruction on how to use them.
23.3 A payment system should provide all necessary and appropriate documentation and training to facilitate participants' understanding of the payment system's rules and procedures and the risks they face from participating in the payment system.
The Bank provides member training and monitors members' operations to ensure that the RITS rules, procedures and features are well understood. Training is provided to all new operationally active members, and is offered to all members when new functionality is introduced. Refresher training is available upon request. Training consists of presentations by the Bank on the key features of RITS, as well as the opportunity to be guided through transaction input and management in a test environment. Members also have access to a RITS test environment on an ongoing basis to help them gain familiarity with RITS. The Bank has established the RITS Help Desk to provide ongoing operational assistance to RITS members. The Help Desk provides support on a 24/7 basis.
23.4 A payment system should publicly disclose its fees at the level of individual services it offers as well as its policies on any available discounts. The payment system should provide clear descriptions of priced services for comparability purposes.
The RITS fees schedule is publicly available on the Bank's website.[79] This schedule provides fees at the level of individual services and provides clear descriptions of priced services. There are no discounts on RITS fees.
23.5 A payment system should complete regularly and disclose publicly responses to the CPMI-IOSCO Disclosure Framework for financial market infrastructures. A payment system also should, at a minimum, disclose basic data on transaction volumes and values.
The assessment of RITS against the Principles is published on the Bank's website.[80] This report addresses all of the matters identified in the Disclosure Framework. The Bank also publishes on its website monthly data on the number and value of RITS payments, as well as a list of RITS members.[81] RITS payments data are also published by the Bank for International Settlements in the Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries on an annual basis.[82]
See CPMI-IOSCO (2015), Application of the Principles for financial market infrastructures to central bank FMIs , August. Available at <http://www.bis.org/cpmi/publ/d130.pdf>. [37]
The RITS regulations are available at: <https://www.rba.gov.au/payments-and-infrastructure/rits/user-doc/pdf/regulations.pdf>. [38]
The CHESS RTGS feeder system provides for the delivery-versus-payment model 1 settlement of equities transactions executed on ASX. This system is currently not used. [39]
A small number of obligations sent through LVSS are settled on a gross basis. [40]
See <https://www.rba.gov.au/payments-and-infrastructure/rits/legalframework.html>. [41]
The RITS information facility is an information web portal for operational users of RITS. See http://www.rba.gov.au/rits/info/aboutrits.htm [42]
For further details on the scope of the legal opinion, see <https://www.rba.gov.au/rits/info/pdf/Signing_Instructions.pdf>. [43]
Information on the role of the Bank in maintaining financial stability is available at <https://www.rba.gov.au/fin-stability/reg-framework/role-of-the-reserve-bank-in-maintaining-financial-stability.html>. [44]
Information on the Bank's objectives in relation to its operation of RITS is available at <https://www.rba.gov.au/payments-and-infrastructure/rits/about.html>. [45]
Information on the Payments System Board is available at <https://www.rba.gov.au/about-rba/boards/psb-board.html>. [46]
A summary of the governance arrangements of the Bank is available at <https://www.rba.gov.au/about-rba/governance.html>. [47]
The RBA (2019), 2019 Reserve Bank of Australia Annual Report . Available at <https://www.rba.gov.au/publications/annual-reports/rba/index.html>. [48]
These are set out in the document Managing Potential Conflicts of Interest arising from the Bank's Commercial Activities , available at <https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/conflict-of-interest.html>. [49]
This policy is available at <https://www.rba.gov.au/about-rba/our-policies/risk-management-policy.html>. [50]
This policy is available at <https://www.rba.gov.au/about-rba/our-policies/risk-appetite-statement.html>. [51]
Outright sales to the Bank are limited to Australian government securities with a residual maturity of less than 18 months. [52]
For operational notes on the TFF, see <https://www.rba.gov.au/mkt-operations/term-funding-facility/operational-notes.html>. [53]
The policy is available at <https://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html>. [54]
This requirement does not apply to Commonwealth government securities, semi government securities, securities with an Australian government guarantee or securities issued and/or guaranteed by the New Zealand government. [55]
The current list of eligible securities is available at <https://www.rba.gov.au/mkt-operations/xls/eligible-securities.xls>. [56]
More information on this initiative is available at <https://www.rba.gov.au/securitisations/>. [57]
The Bank uses the terminology ‘margins’ instead of ‘haircuts’ in its publicly available documents. Haircuts are also applied to securities sold by the Bank under securities lending repo, although these transactions do not provide liquidity for settlement of transactions in RITS. [58]
A list of the haircuts used by the Bank is available at <https://www.rba.gov.au/mkt-operations/resources/tech-notes/margin-ratios.html>. [59]
Intraday repos do not require mark-to-market margin collection, as they are reversed by the end of the business day. [60]
The repurchase amount for a repo is the value of the repo purchase price adjusted for accrued interest. [61]
Intraday repos involving Commonwealth Government Securities or semi-government securities are recorded outside of this system unless they are extended to become overnight repos. [62]
‘Coupon passes’ refer to the Bank passing the coupon payments on securities that it has purchased under a repo agreement back to the seller of the securities. [63]
For more information on the types of repos and securities eligible to be settled via ASX Collateral see <https://www.rba.gov.au/mkt-operations/resources/tech-notes/settlement-procedures.html>. [64]
For more information see RBA (2013), ‘Box B: ASX Collateral’, ‘Self-assessment of the Reserve Bank Information and Transfer System’, p 12. Available at <https://www.rba.gov.au/payments-and-infrastructure/rits/self-assessments/2013/>. [65]
Wholesale RTGS payments settled using the ‘auto offset’ functionality are settled in full across relevant ESAs simultaneously. These payments are posted in full to the ESAs and are not subject to bilateral netting. [66]
For more information, see RBA (2019), ‘Assessment of ASX Clearing and Settlement Facilities’, September, Standard 10. Available at <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/assessments/asx/>. [67]
CLSClearedFX was launched in July 2018 and settles cash flows arising from deliverable FX derivatives cleared by CCPs in a number of currency pairs, including AUD/USD. [68]
FSS fees are volume-based and capped for the first five years of operation of the FSS but thereafter the Bank retains the option of changing the volume based fee and/or introducing a value-based fee depending on the usage of the FSS. [69]
For further information on the operational resilience of Austraclear see: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/assessments/asx/>. [70]
This framework is available at <https://www.protectivesecurity.gov.au/Pages/default.aspx>. [71]
In 2012, the Oversight Group set up the SWIFT Oversight Forum to include senior overseers from the G10 central banks and 10 additional central banks including the Bank, in the oversight process. Through its membership of the Oversight Forum, the Bank is able to access information relevant to SWIFT oversight. [72]
See RBA (2019), ‘Assessment of ASX Clearing and Settlement Facilities’, September, Standard 14.9. Available at <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/assessments/asx/>. [73]
These standards are established under Austraclear Regulation 28.15 and elaborated under paragraph 28.15 of the Austraclear Procedures, Determinations and Practice Notes. For more information on ASX Collateral and its implications for Austraclear, refer to RBA (2019), ‘Assessment of ASX Clearing and Settlement Facilities’, September. Available at <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/assessments/asx/>. [74]
A liquidity sink refers to liquidity accumulating in a participant's account, disrupting liquidity recycling and thereby preventing other participants from settling their payments. [75]
FSS transactions are not included in this calculation. [76]
There is work underway to migrate the SWIFT messages used by RITS from the current MT standard to ISO 20022. Please refer 3.4.1 in the material developments for further information. [77]
ASX also controls the procedures and standards for payment messages through a third RTGS feeder system, CHESS-RTGS, which is currently not used. [78]
The RITS fee schedule is available at https://www.rba.gov.au/payments-and-infrastructure/rits/membership/schedule-fees.html. [79]
Current and previous Assessments of RITS are available at <https://www.rba.gov.au/payments-and-infrastructure/rits/self-assessments/>. [80]
Monthly RITS transaction data is available in C7 Real-time Gross Settlement Statistics of the RBA Statistical Tables at <https://www.rba.gov.au/statistics/tables/>. A list of RITS members is available at <https://www.rba.gov.au/payments-and-infrastructure/rits/membership/membership-list.html>. [81]
These data are available at <http://www.bis.org/list/cpmi/tid_57/index.htm>. [82]