The International Monetary Fund's (IMF) 2006 Financial System Stability Assessment (FSSA) report on Australia concludes that Australia's Reserve Bank Information and Transfer System (RITS) is a sound and efficient payment system and complies with all the Core Principles (CPs) for Systemically Important Payment Systems developed by the Committee on Payment and Settlement Systems. The Reserve Bank of Australia (RBA) owns and operates RITS, which is classified as the only systemically important payment system in Australia. RITS, which has been operational since 1991, was launched as a real time gross settlement system in 1998. The RBA oversees RITS and other payment and securities clearing and settlement systems operating in Australia and its oversight of RITS is deemed robust by the FSSA. The payments system policy and oversight are the responsibility of the Payments System Board (PSB) that resides within the RBA. RITS is judged to be operating on a solid legal basis, its risk management structures appropriate, and its governance framework effective and transparent. The IMF has forwarded recommendations pertaining to some CPs only in order to further enhance the operations of RITS and its regulatory environment. However, the Australian authorities declare their intent to work towards addressing the potential gaps brought up by the FSSA, and indeed mention that they have been working on upgrading the RITS user interface to make it more confidential. The 2007 annual report of the PSB also indicates continued and consultative reform initiatives to make payment systems in the country more efficient, cost-effective and user friendly.

General Overview

Based on the findings of the IMF's 2006 Financial System Stability Assessment (FSSA), Australia's Reserve Bank Information and Transfer System (RITS) is a "sound and efficient" (2006a, p. 45) payment system and complies with all the relevant Core Principles (CPs) for Systemically Important Payment Systems developed by the Committee on Payment and Settlement Systems. The Reserve Bank of Australia (RBA), the country's Central Bank, also fulfils all four Central Bank responsibilities in applying the Core Principles. Core Principle V - relating to multilateral netting systems - is not applicable to the Australian context, since RITS is a real-time gross settlement (RTGS) system. RITS, that is owned and operated by the RBA, is designated as the only systemically important payment system in the country. The IMF assessment further comments that the "legal basis for the system's operation is solid, its functionality is well-developed, its risk management to mitigate credit and liquidity risks is appropriate and its governance structure is effective and transparent" (2006a, p. 45). The FSAP team has forwarded recommendations pertaining to some CPs only "in order to further enhance the operations of RITS and its regulatory environment" (IMF 2006a, p. 45).

RITS was launched as Australia's first RTGS system in 1998 (though it has been operational since 1991, as stated on the RBA website) and is overseen by the RBA. The RBA is empowered by the Reserve Bank Act and the Payment Systems (Regulation) Act to oversee RITS as well as other payment systems operating in the country. The role, mandate, and objectives of the RBA in the field of payment systems are defined in the Reserve Bank Act. The objectives of the RBA as stipulated in the Act are to maintain efficient payment systems, promote competition in the market for payment services, and control risks in the financial system. Further, the Payment Systems (Regulation) Act empowers the RBA to designate and set access regimes and risk control and efficiency standards for payment system participants, and also obtain information from them. The Payments System Board (PSB) within the RBA sets out and carries out policies for payment systems and its mandate is spelled out in the Reserve Bank Act. The PSB is chaired by the Governor of the RBA and its policies are prepared and implemented through the RBA's Payments Policy Department. The second department is the Payments Settlements Department that is charged with the responsibility of operating RITS. In this context, the IMF assessment observes that Australia was the first country to establish a separate Board and make it responsible for payment system policy and oversight. The PSB is mandated to "define the RBA's payments system policy in a way that will best contribute to controlling risk in the financial system as well as promoting efficiency and competition in the market for payment services, consistent with overall stability of the financial system" (2006b, p. 132). The oversight role, policies, procedures and practices of the PSB are found to be open and transparent by the IMF assessment. Cooperation arrangements between the RBA and the banking sector and payment system providers are also deemed good.

RITS processes and settles transactions in real-time, continuously and irrevocably, mentions the IMF FSSA. Large value interbank transfers are channeled through the SWIFT network, while small value transactions are channeled through the proprietary network infrastructure. Apart from settling interbank obligations, RITS also settles equity transactions in the Clearing House Electronic Sub-register System, and the cash leg of the securities transactions on a real time gross basis in the Austraclear securities settlement system. Therefore, RITS settles both time-critical low value and high value payments. The RBA website adds that membership in the RITS is mandatory for all Australian-licensed banks, for participants in the RBA's domestic market operations, and for Batch Administrators. Each member maintains an Exchange Settlement Account (ESA) with the RBA. The 2007 annual report of the PSB notes that RITS is recording a continuous rise in the number and value of transactions it settles. Of the total value of non-cash payments, three-quarters was settled in RITS, and of the total interbank settlements, RITS accounted for 90 percent of the value of payments. An average day in 2006/07 saw transactions totaling 27,000 valuing at approximately USD 168 billion in RITS.

Other domestic organizations relevant to the Australian payment systems, per the FSSA, include the Australian Prudential Regulation Authority (APRA) that supervises deposit taking institutions such as banks, credit unions, and specialist credit card institutions. These institutions are participants in the payments systems and offer payment services. Secondly, the Australian Securities and Investments Commission (ASIC) monitors market integrity and consumer interests in payment transactions. Under the Corporations Act, it regulates all corporations, financial markets, clearing and settlement facilities, and financial services providers. In cooperation with the RBA that has been formalized in a memorandum of understanding (MoU), the ASIC monitors the clearing and settlement facilities in Australia. Thirdly, the Australian Competition and Consumer Commission (ACCC) is responsible for ensuring that "payments system arrangements comply with the competition and access provisions of the Trade Practices Act 1974" (2006b, p. 130). The last relevant organization is the Australian Payments Clearing Association (APCA), which states on its website that it is the "Australian payments industry's principal self-regulatory body [and] ... the primary vehicle for payments industry collaboration with a mandate to improve the safety, reliability, equity, convenience and efficiency of the Australian payments system." Its membership comprises the RBA, banks, building societies, credit unions, and other payment organizations participating in its five payments clearing systems. The APCA operates five clearing systems: (1) Australian Paper Clearing System for checks and other paper-based payment instruments; (2) Bulk Electronic Clearing System for direct entry (credit and debit payments); (3) Consumer Electronic Clearing System for electronic funds transfer at point of sale (EFTPOS) and automated teller machine (ATM) transactions; (4) High Value Clearing System for settlement of high value, real-time payments between financial institutions; and (5) Australian Cash Distribution and Exchange System for the trading and distribution of bulk notes and coin between banks. In this capacity, the APCA manages and develops regulations, procedures, policies, and standards pertaining to payment systems in the country. It achieves this objective through the promotion of a cooperative environment for policy formulation and self-regulation, and fosters consensus among its members to achieve efficient, reliable and mature payment systems.

The 2007 PSB annual report outlines the major reform initiatives undertaken in the year 2007 and continued from the previous years. The reforms to the credit card system that commenced in 2002 came up for a review starting May 2007, wherein two studies - one pertaining to the costs associated with different methods of payment both to the financial institutions and to the merchants and other participants in the systems, and the other pertaining to how different methods of payment are used by consumers - were conducted. The study encompassed payment instruments including cash payments, credit cards, scheme debit cards, EFTPOS, checks, direct entry and BPAY. The PSB annual report mentions that over the last several years, the PSB has focused on enhancing the efficiency of retail payment systems, especially card-based systems. The reform effort included "establishing clearer price signals to cardholders; removing restrictions on merchants; improving access; and increasing transparency" (p. 19). Interchange fee differentials between the credit card, EFTPOS, and scheme debit systems were also reduced.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

FC

RITS observes this principle, per the 2006 Detailed Assessment by the IMF. Further, "the current regulatory framework ensures that the design and operations of RITS have a solid legal basis as well as the validity and enforcement of payment transactions" (2006a, p. 45). All relevant laws and contractual agreements governing and binding the RITS participants are fully enforceable and final settlements in the systems cannot be disputed. The RBA is empowered by the Reserve Bank Act and the Payment Systems (Regulation) Act to oversee RITS as well as other payment systems operating in the country. The Payments System Board within the RBA sets out and carries out policies for payment systems and its mandate is spelled out in the Reserve Bank Act. The IMF, however, advises Australia to enhance legal certainty by undertaking an analysis of the conflict of laws and the likelihood of legal risk for RITS and its participants, especially in the context of those participants that do not fall under Australian jurisdiction.

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

FC

RITS observes this principle according to the 2006 Detailed Assessment by the IMF. Further, "the contractual arrangements, the available documentation, and the publications of the RBA enable participants to understand the system's impact on each of the financial risks they bear through participation in RITS" (2006b, p. 136).

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

FC

RITS observes this principle, per the 2006 Detailed Assessment by the IMF. "The design and the functionalities provided by RITS protect the participants against credit risk and enable them to manage their liquidity risk appropriately" (2006b, p. 138).

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

FC

RITS observes this principle according to the 2006 Detailed Assessment by the IMF. RITS, being an RTGS system, provides prompt final settlement during the day. Operating times in the system are also "clearly defined and monitored" (2006b, p. 139).

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

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This principle is not applicable in the Australian context, since RITS is an RTGS system.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

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According to the 2006 Detailed Assessment by the IMF, RITS observes this principle. "Settlement takes place in central bank money" (2006b, p. 139) thereby eliminating settlement bank or deposit risk in the system. Also, since very few banks use other banks as settlement agents to participate in the system, the credit risk associated with that is also deemed negligible by the assessment.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

FC

RITS observes this principle, per the 2006 Detailed Assessment by the IMF. Further, "the RBA has rigorous and comprehensive security policy measures and procedures in place in order to ensure a high degree of operational reliability" (2006b, p. 142). However, the IMF recommends the RBA to enhance security arrangements of RITS to ensure confidentiality, integrity and authenticity of transferred information over the RITS network that meet international standards. The RBA is also advised to commission an external review of its contingency preparedness and business continuity plan as well as the changes introduced in the system that include software, hardware and internal procedures.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

FC

According to the 2006 Detailed Assessment by the IMF, RITS observes this principle. Further, "RITS provides a reliable service to its participants that appears to fit the needs of its users and fulfils the public interests by reducing systemic risks and offering an efficient channel for the execution of monetary policy" (2006b, p. 143). The IMF, however, observes that the price structure of RITS has not evolved since the system's launch in 1998. The RBA has undertaken studies of the costs of operating the system and compared them to the pricing structure. However, no consultation with the end user has been made. The assessment, therefore recommends the RBA to not only consult with RITS users about its review of the cost and price of using the system, but also amend the pricing structure to maintain the system's efficiency.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

FC

RITS observes this principle, per the 2006 Detailed Assessment by the IMF. Further, "the access rules for RITS are clear, publicly disclosed, fair and objective. The access criteria do not have a restrictive impact on competition" (2006b, p. 144).

X. The system's governance arrangements should be effective, accountable and transparent.

FC

According to the 2006 Detailed Assessment by the IMF, RITS observes this principle. RITS' governance arrangements are effective, accountable, and transparent. The IMF, however, suggests that the RBA re-establish a consultative framework with users of RITS to ensure that RITS continues to be efficient, practical and user-friendly by setting up an advisory user group representing different categories of RITS participants. This group would discuss matters relating to the RITS' technical and business features.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

FC

The RBA observes this principle, per the 2006 Detailed Assessment by the IMF. The role, mandate and objectives of the RBA in the field of payment systems are defined in the Reserve Bank Act. The objectives of the RBA as stipulated in the Act are to maintain efficient payment systems, promote competition in the market for payment services, and control risks in the financial system. Further, the Payment Systems (Regulation) Act empowers the RBA to designate and set access regimes and risk control and efficiency standards for payment system participants, and also obtain information from them. The IMF assessment observes that Australia was the first country to establish a separate Board and make it responsible for payment system policy and oversight. Two departments within the RBA are responsible for, respectively, preparing and implementing policy (the Payments Policy Department), and operating RITS (the Payments Settlements Department). However, the assessment notes that the governance arrangements of the PSB, to which the Payments Policy Department reports, could lead to a potential conflict of interest. The IMF, therefore, recommends Australia to make appropriate changes so as to prevent the likelihood of conflict of interests. The PSB is also advised to discuss the major changes introduced in RITS as part of its oversight function.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

FC

The RBA observes this principle, the 2006 Detailed Assessment by the IMF notes. The PSB is in charge of the oversight of RITS as well as other payment systems in the country, and as part of its responsibility, it "ensures that the operations of RITS as well as changes to the system comply with the Core Principles" (2006b, p. 146).

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

FC

The RBA observes this principle, notes the 2006 Detailed Assessment by the IMF. The assessment, however, notes that since there are no privately operated systems in Australia that are deemed systemically important by the RBA, it does not need to monitor their compliance with the Core Principles. Nevertheless, the assessment advises the RBA to strengthen its oversight function by developing formal rules and procedures, such as regular on-site inspections of important payment systems, regular monitoring and reporting, and regular meetings with payment systems providers and stakeholders.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

FC

The RBA observes this principle, as noted by the 2006 Detailed Assessment by the IMF. The RBA cooperates with other relevant domestic authorities "which have interests in various aspects of the payments system" (2006b, p. 147), particularly the APRA, but also with the ASIC and the ACCC. The RBA has signed MoUs with each of these regulators that set out the terms of cooperation and facilitate information exchange in the interest of the payment systems in Australia. Further, the RBA also actively participates in a number of international fora "to promote the stability of financial markets and sound and legally robust payment systems" (2006b, p. 148). Notably, the RBA was a member of the Committee on Payment and Settlement Systems' task force on Payment Systems Principles and Practices that drafted the Core Principles.