2013 Self-assessment of the Reserve Bank Information and Transfer System 2. General Background

RITS is Australia's RTGS system. It is operated by the Bank and settles transactions across Exchange Settlement Accounts (ESAs) held at the Bank. In RTGS systems, individual payments are processed and settled continuously and irrevocably in real time. RTGS was introduced in Australia in June 1998 to eliminate the settlement risk associated with deferred net settlement of high-value interbank payments and to promote the overall efficiency of Australia's wholesale payments system. This background section presents an overview of RITS activity and its operational arrangements, as well as some key design features and settlement performance statistics.

2.1 RITS Activity

Consistent with RITS being the principal domestic payment system in Australia, around 70 per cent of the value of non-cash payments in Australia is settled on an RTGS basis in RITS.^[1] In the year to October 2013, RITS settled on average around 41,000 RTGS transactions each day, with an aggregate daily value of around $160 billion (Graph 1). On the peak-value day in that period, RITS settled around 49,000 RTGS transactions worth a total of $249 billion. Following a decline during the global financial crisis, the number of RTGS transactions rebounded relatively quickly and has returned to trend, with an average growth rate of about 5 per cent per annum over the past 10 years. In contrast, the daily aggregate value of RTGS transactions has remained in a relatively narrow range since the global financial crisis.

RITS was developed to address the settlement risk associated with high-value interbank payments. However, since there is no minimum value for payments submitted to RITS, RTGS can also be used to settle time-critical low-value payments. The growth of the average daily number of RTGS transactions settled in RITS largely reflects an increase in the number of lower value payments, defined as having a transaction value of less than $1 million (Graph 2). In contrast, the number of RTGS transactions for values of more than $1 million has been broadly stable.

2.2 Feeder Systems to RITS

RTGS payments can be entered into RITS directly (these payments are known as RITS cash transfers), or delivered via two linked external feeder systems: the Society for Worldwide Interbank Financial Telecommunications (SWIFT) Payment Delivery System (PDS) and Austraclear (Figure 1).^[2] The SWIFT PDS is a closed user group governed by the Australian Payments Clearing Association (APCA), an industry body that sets rules and procedures for clearing and settling payments in Australia, under APCA's High Value Clearing System (HVCS). The SWIFT PDS is used primarily to submit customer and bank-to-bank payments to RITS, including the Australian dollar leg of foreign exchange transactions that settle in CLS Bank International (CLS). Austraclear transactions generally represent the cash legs of debt security transactions, which are settled on an RTGS basis, although payment instructions that are not associated with the settlement of securities transactions may also be sent via the Austraclear system.

While RITS is primarily an RTGS system, it also facilitates the settlement of interbank obligations arising from net settlement systems. The cash legs of equities transactions settle in a multilateral net batch at around noon each day. These multilateral net obligations are calculated by the Clearing House Electronic Sub-register System (CHESS), which is operated by ASX Settlement. The interbank obligations that arise in retail payment systems are settled on a deferred net basis in RITS. Bilateral net settlement obligations arising from each separate APCA clearing system, including cheque, DE (including the BPAY system) and card (ATM, eftpos and credit card), are provided to the Bank by each participant through the LVSS. These obligations are totalled periodically, along with clearing interest obligations, and settled on a multilateral net basis in RITS. Historically, these obligations have been settled on a next-day basis in a batch process which runs at 9.00 am. Since 25 November 2013, however, DE obligations have been settled an additional five times daily on a same-day basis (see ‘Box A: Developments in Retail Payments Settlement Arrangements’ for further details).

2.3 Operating Hours

Standard settlement hours in RITS, as established by the RITS Conditions of Operation, are 7.30 am to 10.00 pm. These hours have been extended to facilitate same-day settlement of DE payments submitted to RITS at 9.15 pm. Prior to 25 November, RITS closed at 6.30 pm Australian Eastern Standard Time and 8.30 pm during Australian Eastern Daylight Time (the first Sunday in October to the first Sunday in April); these remain the times when settlement of SWIFT and Austraclear transactions ceases.

Prior to 9.15 am, settlement is limited to RITS cash transfers, interbank Austraclear transactions and the deferred net obligations settled in the 9.00 am batch process (during the ‘9.00 am processing session’) (Figure 2). Other payment instructions can be submitted to RITS during this time, but they are not tested for settlement until the ‘day session’ commences.

There are also restrictions on the types of payments that can settle in the ‘evening settlement session’. Only ‘evening agreed’ settlement participants, as defined in the RITS Regulations, can participate fully in the evening settlement session from 5.15 pm onwards.^[3] Consequently, to allow the settlement of remaining queued transactions at the end of the day session, there is a 45 minute settlement close session. At the end of the ‘settlement close session’, any remaining queued payments involving non-evening agreed participants are removed from the queue.

2.4 Liquidity Risk Management

As an RTGS system, RITS prevents the build-up of large interbank exposures, which would otherwise occur if high-value payments were settled on a deferred net basis. However, RTGS systems require participants to hold substantial liquidity in order to settle payments individually. Accordingly, the Bank seeks to facilitate effective liquidity risk management by participants in two main ways: liquidity-saving features in the design of RITS; and the provision of liquidity to settle payment obligations at low cost, including through intraday and open repos.

2.4.1 Design features

RITS is designed to enhance efficiency in the use of liquidity within the system. It incorporates a central queue and a ‘next-down looping’ algorithm that continuously re-tests unsettled payments in order of submission (Figure 3). If the transaction being tested for settlement cannot be settled individually, the ‘auto-offset’ algorithm searches for up to 10 offsetting transactions (based on the order of submission) between a pair of participants and attempts to settle these simultaneously.^[4] Participants can also nominate specific offsetting payments to be settled simultaneously to assist in managing client credit constraints; this functionality is known as ‘targeted bilateral offset’.

RITS participants have access to a range of information to enable them to manage their liquidity risk effectively. This information is available either through the RITS User Interface, or via SWIFT using the Automated Information Facility. These tools provide participants with real-time information to manage their liquidity efficiently. In particular, RITS participants have access to information on their current ESA balance, settled payments and receipts, queued inward and outward transactions, the value of first- and second-leg intraday repos, and their projected end-of-day ESA balance.

RITS also has a ‘sub-limit’ feature that allows participants to efficiently manage and conserve liquidity. Participants can determine the way in which individual transactions draw on liquidity by setting the payment status (‘deferred’, ‘active’ or ‘priority’) and reserving liquidity for priority payments by setting a sub-limit (Figure 4):

• Payments with a deferred status are not tested for settlement until their status is amended.
• Active payment instructions are settled as long as the level of the paying institution's ESA balance remains above the participant's specified sub-limit.
• Priority payments, by contrast, are tested against the full ESA balance.

This functionality can be accessed through either the RITS User Interface or via SWIFT messages. Sub-limits can be changed at any time during the settlement day. As of March 2013, new functionality was introduced to RITS that allows participants to streamline the process of monitoring and managing low value payments, by setting the status of all payments below a certain specified threshold value to priority in order to minimise the number of payments on the queue.^[5]

RITS participants use these liquidity management features extensively. Approximately 25 per cent of the value of RITS payments settled in the year to end October 2013 were settled using auto-offset, while 19 per cent were settled as priority payments (Graph 3). While a steady flow of active payments are settled individually throughout the day, the proportion of payments (by value) that settle using the auto-offset functionality peaks at around midday. The majority of priority payments are settled towards the end of the day session.

2.4.2 Intraday liquidity

Liquidity can been sourced from participants' opening ESA balances and additional funds made available to participants by the Bank via intraday repos. The aggregate of opening ESA balances ultimately has been determined by the Bank's open market operations, which are aimed at maintaining the overnight cash rate at its target. In contrast, ESA holders' access to liquidity through the use of intraday repos is limited only by their holdings of eligible securities. In the exceptional case that a participant is unable to reverse an intraday repo with the Bank by the end of the day, the transaction can be converted to an overnight repo. Interest would then be charged at 25 basis points above the cash rate target.

As of 11 November 2013, liquidity in RITS can also be sourced through ‘open’ repos of eligible securities. These arrangements were introduced to facilitate same-day settlement of DE payments, as discussed in ‘Box A: Developments in Retail Payments Settlement Arrangements’. As a result, RITS participants' use of intraday repos has been largely replaced by open repos.

In its repo arrangements, the Bank accepts only highly rated debt securities denominated in Australian dollars and lodged in Austraclear. Under these repos, outright title to collateral is exchanged in return for a credit to the participant's ESA, with an agreement to reverse the transaction at some point in the future. Currently, these repos are directly managed in Austraclear. In the future, it is expected that RITS participants will also have the option of using ASX Limited's (ASX's) recently launched centralised collateral management service, ASX Collateral, which automates the optimisation and allocation of collateral for participants' repos with the Bank (see ‘Box B: ASX Collateral’).

The list of eligible securities for repo to the Bank was expanded in late 2007 to include securities issued by ADIs, residential mortgage-backed securities and asset-backed commercial paper. While the Bank had been moving over time towards broadening securities eligible for repos, the timing of this change was accelerated by emerging strains in financial markets and the associated increase in demand for liquidity. As is evident in Graph 4, liquidity available for use in RITS peaked in late 2008 in response to participant demand during the global financial crisis and has remained around this level. As a result, liquidity turnover – the average number of times each dollar of liquidity is used to settle a dollar of RTGS transactions – fell steadily through 2007 and 2008 and has stayed at this lower level for the last five years (Graph 5).

2.5 Settlement Performance in RITS

System liquidity plays a role in the timely settlement of RTGS transactions. In general, early settlement of payments during the day is desirable as this assists in the redistribution of liquidity between ESA holders and reduces the potential for significant disruption should a participant experience an operational issue late in the day. Consistent with an expansion in the liquidity available to RITS participants, payments are generally settled earlier in the day than prior to the crisis. For example, in 2006/07 on average it took until 3.00 pm for 50 per cent of the day's payments, by value, to settle whereas in 2012/13 this occurred on average at 1.00 pm.

Liquidity is not the only determinant of the settlement profile of RITS payments; the timing of settlement also depends in part on when RITS participants receive payment instructions from their customers. Both the value and volume of transactions peak at around 9.30 am, soon after the opening of the RITS day session, as offshore customer payment instructions received by RITS participants overnight are submitted to the system (Graph 6). There is another peak in the settlement of high-value transactions around 4.30 pm, in part reflecting participants' liquidity management strategies and the squaring of positions at the end of the day. Consistent with the evidence on earlier settlements, the intraday settlement profile has changed considerably since 2006, with the end-of-day peak in settlement values much less pronounced.

Footnotes

This measure of payments is broader than interbank settlements, since it includes retail payments settled across the books of a commercial bank, such as payments between two customers of the same institution. [1]

There is a third feeder system for settling the cash legs of equity security transactions on an RTGS basis, which is known as the Clearing House Electronic Sub-register System (CHESS) RTGS feeder, but this is currently not used. [2]

RITS participants do not have to be evening agreed if they only participate in DE settlements after 5.15 pm. [3]

Payments are only tested for ‘auto-offset’ if they have been on the queue for at least one minute. [4]

This functionality can also be used to set the status of all payments above a threshold value to priority. [5]