- Omotunde Johnson, Jean-Marc Destresse, Nicholas Roberts, Mark Swinburne, Tonny Lybek, and Richard Abrams
- Published Date:
- March 1998
In this and the following six chapters, similarly structured notes on recent experience in payment system reform are presented for seven countries: Australia,53 France, Poland, Russia, Thailand, the United States, and Zambia.
The first section of each note is an overview of the economic, financial, and banking structure of the country: size, population, geography, and economic situation; a general description of the structure of the banking system, the payment system, and the money and securities markets; and highlights of relevant aspects of the domestic communications and transportation systems.
The second section of each note presents the institutional and organizational framework in which payment system reform is taking place. The organizations charged with managing the payment system and carrying out the reform process are described. The relationship between the central bank and the private sector in planning and carrying out the reforms is examined, and, to the extent possible, the legal and regulatory framework is outlined. The section also lists the major providers of payment services, the operators of the payment systems, and the major users of payment services.
The third section describes the payment instruments used in the country. Where possible, quantitative data are provided on the instruments in use. Available information on risk control measures governing the use of the instruments is also provided.
The fourth section examines the country’s clearing and settlement systems. It begins by describing clearinghouse arrangements, including their administration, participants, the instruments exchanged, the settlement process, and, if possible, the measures in place to control risks. Any large-value transfer systems are then described in similar detail. The section also covers correspondent banking and other clearing and settlement arrangements.
The fifth section reviews the role of the central bank. It begins by describing how the bank organizes its payment-related activities. Next the technology used by the central bank is described, as is the central bank’s role in setting technological standards. This is followed by descriptions of the structure of settlement accounts at the central bank, the central bank’s policies relating to reserve requirements, the payment services it offers, its credit policies regarding lending to commercial banks and others, and its risk management policies related to its own payment system activities. The section concludes with a discussion of the central bank’s coordination with other countries on payments issues.
The final section of each note describes major ongoing and planned payment system projects or programs, if any, including initiatives undertaken to control payment system risk.
Overview of the Economic and Financial System
Australia is an industrialized country, with a per capita GDP of about US$17,100 (1994/95) and a population of 17.8 million. Its financial system is well developed and includes a range of bank and nonbank financial intermediaries (NBFIs), fund managers, various money and financial markets, and a number of payment instruments and payment systems. Its domestic communications and transportation systems are well developed, which is important given its size of approximately 3 million square miles.
The financial sector is dominated by banks, which, in June 1996, included one government-owned bank; 21 private, locally incorporated domestic banks; 11 locally incorporated subsidiaries of foreign banks; and 18 branches of foreign banks.54 This group accounted for almost half of the financial sector’s assets at end-1995, while four nationally operating banks accounted for almost two-thirds of the assets of the banking sector. The main types of NBFIs are credit unions, building societies, merchant banks (also called money market corporations), finance companies, and authorized money market dealers.
The financial sector also has three institutions called Special Service Providers (SSPs), one for building societies and two for credit unions. SSPs provide a range of financial services, including settlement services, treasury management, and taking of deposits from, investing for, and lending to their member institutions.
The domestic money and other financial markets are well integrated domestically and internationally. The short-term money market has three primary participants, the Reserve Bank of Australia (RBA), the commercial banks, and merchant banks.55
There are well-developed markets for government and other securities of all maturities, dominated by banks, merchant banks, and authorized money market dealers. Most of the liquidity in these markets is in instruments with maturities of up to ten years. The equities market is also well developed. In June 1995, the total market value of listed domestic equities was equivalent to 72 percent of 1994/95 GDP.
Institutional and Organizational Framework56
The Main Organizations
There are three bodies that are largely responsible for the management, operation, and reform of Australia’s payment systems: the RBA, the Australian Payments System Council, and the Australian Payments Clearing Association Ltd. However, various oversight and other bodies also have an interest in domestic payment systems.
The RBA operates under the Reserve Bank Act 1959, and draws most of its powers and functions from the Banking Act 1959. Under the laws, the RBA’s statutory responsibilities in the area of payments are narrowly focused, relating mainly to currency issue and interbank settlement accounts. However, its statutory responsibilities for the prudential oversight of banks, and for the overall stability of the financial system, lead it to be interested in all aspects of payment system development.
The RBA is also an important facilitator and provider of payment services, including printing, issuing, reissuing, and distributing currency; acting as banker to banks, and providing Exchange Settlement Accounts (ESAs) for banks and two SSPs; acting as banker to the Commonwealth Government and other government instrumentalities; providing registry services and a delivery versus payment (DVP) settlement facility for Commonwealth Government securities; and conducting accounts for other central banks and some international financial organizations.
The Australian Payments System Council (APSC)
In 1984, the Commonwealth Government established the APSC to monitor and assess issues relating to the operation and management of Australia’s payment systems.57 However, the APSC has no role in the day-to-day operation of domestic payment systems. The APSC is chaired by the RBA, and its membership is drawn from groups with an interest in payment system issues and includes representatives from providers of payment services—including banks, building societies, credit unions, and merchant banks; consumer groups and users; telecommunications suppliers; retailers; and officials from the RBA, the Treasury, and the Australian Competition and Consumer Commission.
Australian Payments Clearing Association Ltd. (APCA)58
In 1992, the APCA was formed to manage and develop domestic payment and clearing systems. It is a private company, with a board of directors drawn from its shareholders, which are the main providers of payments services, including the RBA, the banks, building societies, and credit unions. The objectives of the APCA are to optimize payment system efficiency, reliability, and security; preserve payment system integrity; control risks; ensure that equity and competitive neutrality are applied in determining participation; and provide timely and well-based information on developments.
The APCA’s operations are divided among four groups, based on the type of payment instruction: the Australian Paper Clearing System (APCS) for checks, payments orders, and other paper-based instruments; Bulk Electronic Clearing System for low-value electronic debit and credit payment instructions; the Consumer Electronic Clearing System for card-based ATM and Electronic Funds Transfer at point of sale (EFTPOS) transactions; and High-Value Clearing System for large-value electronic payment instructions. Each group includes representatives from a range of financial institutions and has a separate management committee reporting to the board of the APCA. There is no formal relationship between the APCA and the APSC, but the RBA currently chairs both organizations, and all institutions represented on the board of the APCA are also represented in the APSC.
Other Interested Organizations
Several other bodies have an interest in payment system development and reform. Two of the more important are the Council of Financial Supervisors and the Australian Financial Institutions Commission (AFIC). The Council of Financial Supervisors was established in 1992 to promote the exchange of information among all supervisors in the financial sector and to avoid inconsistencies and gaps in the supervisory system. This nonstatutory body is chaired by the RBA and includes the heads of the AFIC, the Australian Securities Commission, and the Insurance and Superannuation Commission. The AFIC was set up in 1992 to oversee the prudential supervision of building societies and credit unions, conducted by state-based supervisory authorities. The AFIC also has direct responsibility for the supervision and control of industry-funded liquidity support arrangements and the supervision of SSPs.
The Legal Framework
A range of legislation is relevant to payment activities and oversight. The Banking Act 1959 covers bank activities, authorization, and supervision, and permits other financial institutions to offer various financial services, including payment services. It also empowers the RBA to assume control of any bank that is, or appears likely to be, unable to meet its obligations. Under the law, deposit liabilities in Australia have priority over all other claims against the Australian assets of a bank.59 The Australian Financial Institutions Commission Act 1992 established the AFIC to oversee the application of national prudential standards for credit unions and building societies.
The Cheques and Payment Orders Act 1986 is the principal legislation dealing with paper-based payment instruments and establishes the legal framework under which these instruments are drawn and paid. This law is currently under review.
Large-value payment systems are regulated by their owners.60 Underlying some of the rules are the Commonwealth Inscribed Stock Act 1911 and the Bills of Exchange Act 1909, which provide a legal framework, respectively, for the use of Commonwealth Government securities and of bills of exchange.
Other key legislation relevant to domestic payment systems includes the Telecommunications Act 1989, which established the Australian Telecommunications Authority as an independent regulatory authority for the telecommunications industry; the Trade Practices Act 1974, which deals with aspects of the abuse of market power, price fixing, and consumer protection that are relevant to the operation of payment systems; and the Financial Transaction Reports Act 1988 and the Proceeds of Crime Act 1987, which respectively deal with detecting money laundering and making money laundering an offense.
The Corporations Law contains laws relating to the conduct of corporations, including insolvent corporations, and gives legal backing for the rules governing Australia’s exchange-traded securities, futures, and the options markets, including those relating to clearing and settlement.
Bank Notes and Coin
While payment systems are well developed and numerous noncash payment instruments are available, cash remains the most commonly used instrument for low-value transactions. It is estimated that about 90 percent of all transactions in Australia are in cash.
The RBA is the sole issuing authority for Australian currency notes; coins are minted by the government-owned Royal Australian Mint. Bank notes are printed by Note Printing Australia (NPA), a division of the RBA, which operates as a separate enterprise with its own board and management. Bank notes are issued in denominations of $A 5, $A 10, $A 20, $A 50, and $A 100, and coins are minted in denominations of 5¢, 10¢, 20¢, 50¢, $A 1, and $A 2. All bank notes are polymer rather than paper, are hard to counterfeit, and are quite durable and soil-resistant.
Checks have traditionally been the favored instrument for noncash payments; until the 1970s, they were virtually the only noncash instrument. Despite the development of other payment instruments, checks remain popular. In 1995, checks accounted for 45 percent of the volume, and 39 percent of the value, of noncash payments in Australia.62 However, while the absolute volume of checking transactions has remained constant at about 1 billion a year, in recent years the relative value of checks cleared between institutions has declined dramatically, from 59 percent in 1991 to 35 percent in 1995.
Under current legislation, checks must be drawn on banks, but some NBFIs may offer checking facilities through check-issuing arrangements with banks. NBFIs may, however, issue payment orders; but they have mostly chosen not to do so.63
Electronic bulk payments, in the form of direct credits—and to less extent, direct debits—are also widely used in Australia. Such payments are generally made by exchanging magnetic tape or increasingly by direct computer linkups. Bulk exchanges are made bilaterally. Since March 1994, banks, building societies, and credit unions have organized under an integrated but decentralized national framework of rules called the Bulk Electronic Clearing System (BECS). The RBA has also developed its own Government Direct Entry Service (GDES), which processes bulk transactions for RBA customers (mainly government agencies) using its data link between its customers and all financial institutions.
Direct credits are used to make direct payments to groups of related recipients. They have become popular with both the government (for example, for social security payments) and the private sector (for example, for payroll and dividend payments). In 1995, direct credit transfers accounted for about 22 percent of the volume, and 2 percent of the value, of noncash payments.
Direct debits are used mostly by insurance companies, banks, and other bodies that collect regular payments. Financial institutions subject these transactions to closer control than direct credits, because the instructions regarding the amount and the timing of the transaction are sent by the payee. In 1995, direct debit transfers accounted for about 4.5 percent of the volume, and 1 percent of the value, of cashless payments.
Various plastic payment cards are also available. Credit cards are issued by banks, NBFIs, and some retailers. The most common are Visa, MasterCard, and Bankcard. In 1995, there were about 10 million credit cards used by financial intermediaries outstanding in Australia. Debit cards are issued by banks, credit unions, and building societies. Both types of cards can be used, inter alia, in ATMs, cash dispensers, automated gasoline pumps, telephones, and POS terminals. In 1995, payments by credit and debit cards, excluding ATM transactions, accounted for over 28 percent of the volume but only 0.1 percent of the value of cashless transactions.
ATMs were introduced in 1981. There are no legal restrictions on the location or number of machines, but operators have agreed to meet standards covering their design and placement. Some limited-purpose cash dispensers, which can be used only for withdrawals and inquiries, have also been introduced. In 1995, there were over 6,000 ATMs and cash dispensers, and withdrawals through those machines were equivalent to about 17 percent of the volume and 0.2 percent of the value of cashless payments.
POS systems support debit payments, guaranteed by the customer’s bank. Many POS systems also offer cash facilities. There are currently eight interlinked POS systems operating in Australia. In 1995, POS transactions were equivalent to 16 percent of the volume and 0.06 percent of the value of cashless payments in Australia (excluding ATM transactions). However, the number of terminals has been growing at nearly a 25 percent annual rate since the late 1980s, with the transactions volume growing at nearly twice that rate.
Limited-purpose prepaid cards have also been introduced in Australia, but they have yet to gain in popularity. The most popular use for these cards is for telephone calls. Australia is also currently hosting several pilot trials for stored-value cards, including those of Visa and MasterCard.
Computer-to-computer Electronic Data Interchange (EDI) is beginning to gain popularity in Australia. There are five main networks that handle EDI transactions, and all major banks can receive EDI payment requests directly or through one of the networks. The EDI Council of Australia (EDICA) has been formed to organize work in this area and has 420 members, including a quarter of the top 500 companies. However, the volume of EDI transactions remains small, although it has been increasing rapidly. The APCA is actively promoting the use of financial EDI in Australia.
In 1994, the RBA made settlement facilities for electronic bulk payments available to building societies and credit unions through their SSPs; previously only banks held settlement accounts with the RBA. The RBA has also indicated that it will allow SSPs to use their settlement accounts to settle obligations of their members in the check clearing system, once the Cheques and Payment Orders Act has been amended to allow individual NBFIs the right to issue checks in their own names.
There has been a sustained effort to establish a large-value electronic payment system based on real-time gross settlement (see the last section of the chapter).
Clearing and Settlement Systems64
As noted, the APCA divides clearing and settlement systems into four groups: checks and paper instruments, bulk electronic direct-entry payments, retail EFT, and large-value EFT. However, while the APCA has a committee dealing with large-value systems, it is not responsible for the operation of any large-value systems.
Retail Payment Systems
Clearing of checks, payment orders, and other paper-based instruments is managed by a committee of the APCS, which includes the RBA, banks, building societies, and credit unions and operates under regulations and procedures approved by the Australian Competition and Consumer Commission.
There are two classes of participants. Tier-1A members (currently all are banks) settle their clearing obligations using accounts at the RBA. Tier-2 banks appoint Tier-1A members to clear and settle on their behalf. In June 1996, there were 14 Tier-1A members and 58 Tier-2 members. An additional tier, Tier-1B, is to be introduced. Tier-1B members will use Tier-1A members to clear, but will settle their own obligations directly at the RBA.
Checks are generally delivered to check processing centers in the state and territorial capitals on the day they are deposited, with the aid of an extensive air and road transport network. Once sorted, checks are sent to the appropriate places for presentation. Each clearing bank’s bilateral net position at each regional clearing is reported to the RBA in Sydney by 4 a.m. Sydney time the next morning. Final settlement is then made through the clearing banks’ ESAs (Exchange Settlement Accounts) on a multilateral net basis at 9:00 a.m.
While customers’ accounts are credited on the day of deposit for purposes of interest calculations, they are not given access to the funds for up to five days. However, the APCA is studying ways to reduce the clearing cycle by about two days through projects that introduce electronic exchanges of information. However, practical difficulties such as the absence of electronic links, storage costs and retrieval, and some legal issues (which have recently been addressed) have delayed its implementation.
As noted, the bulk direct entry payments of banks, building societies, and credit unions were combined into the BECS, which is an integrated national system, allowing any member institution to direct electronic credits and debits to customer accounts with any other member institution. Payments for bulk transactions are generally settled before funds are credited to a customer’s account. In 1994, the APCA also took over the management of the system.
Transactions using credit cards issued by financial institutions are cleared bilaterally, and settled the next morning across their ESAs. However, certain cards, including American Express and Diners Club, are not issued by financial institutions, and those companies deal directly with cardholders and merchants, and with the card issuer’s bank in the case of ATM transactions.
Almost all ATMs are linked into one of two national networks, and there is one POS network that gives access to all card issuers. Both systems clear on a net basis and settle through ESAs. Settlement risk is limited through controls on customers’ access to funds and by monitoring bilateral exposures to counter parties.
Large-Value Transfer Systems
Bank Interchange and Transfer System (BITS)
BITS is a general purpose electronic funds transfer system, designed to make large domestic interbank payments with good funds. It is primarily used to make payments in the interbank money market, in the foreign exchange market, and for corporate transactions.65 Payments are irrevocable and deliver immediate good funds to the recipient, which may be a customer or a bank. While transactions are cleared bilaterally, settlement is on a multilateral net basis at 9:00 a.m. the following business day.
BITS began operation in 1987 and is owned and operated by the four major national banks and one other bank. All members have direct interfaces with BITS and the Society for Worldwide Interbank Financial Telecommunications (SWIFT). While other banks may join BITS, none have done so, because their transaction volumes do not justify the cost of full membership. BITS transactions have grown rapidly; by 1995, they totaled $A 22 billion per day, about 30 percent of the value of payments between direct clearers.
BITS transactions are netted bilaterally at the end of each day, and multilateral net positions are settled at the RBA the following morning. However, the requirement of delivery of good funds to the customers upon receipt exposes the recipient bank to settlement risk (credit or liquidity risk or both). There are also no systemwide arrangements for limiting banks’ exposures or for assuring timely settlement if one member fails to meet its obligations. These problems are recognized by market participants, and solutions, in particular RTGS, are under way.
Austraclear and Reserve Bank Information and Transfer System (RITS)
Two electronic registry and transfer systems, Austraclear and the Reserve Bank Information and Transfer System (RITS), also offer cash transfer facilities. Austraclear is an unlisted public company that acts as a central depository and clearinghouse for many private sector and semi-governmental securities traded in Australian markets. It processes transactions in bearer securities, such as bills of exchange, as well as registered securities of corporations, banks, and semi-governmental bodies. In 1993, the daily turnover approached $A 25 billion, about 90 percent of the total turnover of the issuing bodies.
Nonbank members must make payments through a “sponsoring” bank, which does not guarantee payment. At the end of each day, members’ balances are netted multilaterally, including notifying sponsoring banks of their clients’ positions. If a bank is unwilling to cover a client’s net debit position, an unwind is undertaken until all banks will accept their clients’ positions; to date no unwinds have occurred.
Austraclear also allows its members to make cash transfers among themselves, outside of the securities-related circuits. However, it does not provide same-day value; and, as with BITS, there are no rules to deal with a bank that is unable to settle its payment obligations. Austraclear is investigating the possibility of introducing net debit caps prior to the introduction of RTGS at end-1997.
RITS is an electronic transfer and settlement system for Commonwealth Government securities that permits real-time recording and settlement of transactions on a DVP basis. The RBA also uses RITS to settle its transactions with authorized money market and foreign exchange dealers and to make all entries to ESAs. It is similar to Austraclear—in fact, members are connected through the communications network used by Austraclear—but all transactions are irrevocable from the outset. In 1994/95, RITS held about $A 81 billion in government securities and accounted for about 96 percent of trading volume.
Members may make payments that are irrevocably guaranteed by a bank. Banks can, in turn, impose a limit on the client’s cash account in RITS, and the system will not settle transactions that will breach that limit. When a transfer of securities is made from a seller’s security account, an irrevocable payment obligation is created on the buying member’s bank.
RITS allows two types of cash transfers outside of its securities trading circuits. First, banks can make RTGS transfers between their ESAs. Second, transfer instructions can be netted for settlement at 9:00 a.m. the following day. Under both arrangements, the transfer order is irrevocable and immediate. RITS also has a loss-sharing arrangement, under which the surviving banks will cover the losses if one or more banks are unable to make settlement. Amounts owed to a defaulter would be paid into a pool for distribution to surviving banks on the basis of the amount due by the defaulter to each surviving bank.
A new RITS facility has been developed for the simultaneous settlement of interbank obligations arising from the settlement of transactions on the Australian Stock Exchange’s electronic facility (Reserve Bank of Australia, 1995c, p. 56). The new system, CHESS, began operating in 1994, but interbank settlement through the new RITS facility did not commence until 1996.
Settlement between direct clearers is made on a deferred multilateral, net basis daily at 9:00 a.m. across their ESAs. The settlement includes banks, as well as building societies’ and credit unions’ SSPs, which also have limited-purpose ESAs. ESA balances must be positive at all times, and banks have no automatic borrowing facility at the RBA, other than the standard rediscount facility for Commonwealth Government securities.
International correspondent banking is considered part of normal commercial banking operations and is not regulated in any way by the RBA. Australian banks do not hold extensive correspondent balances with one another. Exposure limits to individual banks or groups of banks might be discussed as part of the normal supervisory process.
Role of the Central Bank
Organization of Payments Activity at the Central Bank
The RBA is involved in the operation, development, reform, and surveillance of payment systems in Australia in a number of ways. As discussed above, much of this work is carried out through its participation in and chairmanship of the APSC, the APCA, and, to less extent, the Council of Financial Supervisors.
The RBA also has a major direct role in virtually all aspects of Australia’s payment systems. On the operational side, the RBA’s Business Services Group is charged with all currency management services, paper-based clearing services, the operation of RITS, all netting operations for other clearings, and the ultimate settlement across ESAs.
The RBA’s Financial System Department has responsibility for payment system analysis and reform. Prudential issues are handled by two departments at the RBA: the broader prudential issues affecting the payment system in general, particularly those relating to systemic risk, are handled by the Financial System Department, while the risks from the perspective of the individual bank are the responsibility of the Banking Supervision Department.
Payment systems in Australia use an array of computer technologies. Message and operating standards for RITS are set by the RBA, and standards for other payment systems by the APCA. The platform for the RITS system is based on the Austraclear system and may be accessed by IBM or compatible PC terminals, normally by leased lines, which may be encrypted at the client’s expense. The emergency backup, disaster recovery, and security arrangements in RITS are all well developed.
Account Structure, Reserve Requirements, and Credit Facilities
Banks have two accounts at the RBA, an ESA and a Non-Callable Deposit account (NCD); the latter is like required reserves. NCDs, which must have the equivalent of 1 percent of a bank’s liabilities, are blocked; but the RBA pays an interest rate on these accounts at a rate equivalent to 5 percentage points under the rate on 13-week treasury notes at the previous month’s tender. A separate system of Statutory Reserve Deposits was eliminated in 1988.
ESAs must be in positive balance at all times, and the RBA does not offer any automatic borrowing or overdraft facilities. However, the RBA does provide same-day funds to banks through the rediscount of short-term Commonwealth Government securities.
The RBA is responsible for ensuring the soundness of the domestic banking and payment system, which in turn requires that it give high priority to ensuring that problems in one payment system do not endanger the overall operation of the domestic payments mechanism. One key to minimizing the likelihood of a systemic crisis is to ensure that risks in each payment system are contained by appropriate risk management policies. However, while the RBA is well aware of the need for such policies, responsibility for their implementation falls on the participants in each of those payment systems who generate, and are exposed to, settlement risk.
While market participants understand the need for risk management policies, there has been only modest success in implementing such policies. Currently, failure-to-settle procedures and loss-sharing arrangements only exist for the paper-based and bulk direct-entry clearing systems, and for RITS. The risk management policies of the other large-value systems, BITS and Austraclear, currently fall well short of being consistent with the Lamfalussy standards. It is planned that all payments made through these systems will settle on an RTGS by end-1997.
As discussed, the RBA also provides same-day funds (at a penalty rate) to banks to assist their liquidity management. The risks in its normal operations are controlled by providing funds to banks by rediscounting short-term Commonwealth Government securities.
Australia cooperates with the BIS and sometimes with the G-10. To help in the global dissemination of information on payment systems, the RBA worked with the BIS to produce Payment Systems in Australia (see BIS, 1994a), which fully parallels the BIS’s report Payment Systems in the Group of Ten Countries (BIS, 1993b).
Major Ongoing and Planned Payment System Projects
Increasing concerns have arisen regarding the settlement risk posed by Australia’s Deferred Net Settlement (DNS) system, as well as the need to impose real time limits on intraday interbank exposures, particularly on high-value payments. The RBA saw two main approaches to resolving these problems: either moving to an RTGS system or modifying the existing DNS system so that limits on intraday exposures could be imposed in a manner consistent with generally accepted international standards.66 After much discussion among the banks, the RBA, and the APCA, a decision was reached in August 1992 to follow the latter approach, but in a way that would allow an easy transition to RTGS later on. The RBA and the APCA were to jointly design and develop the Payment Registration and Electronic Settlement System (PRESS) and an associated Payment Delivery System (PDS).67
Under the plan, PRESS/PDS was to have been a multilateral DNS system that would control settlement risk by tracking and limiting the intraday exposures of banks to each other across a number of payment systems. High-value payments were to be registered individually in real time, and any payment that would violate a credit limit would be queued and returned to the sending bank if still unregistered by the end of the day. PRESS was to be owned and operated by the RBA, and PDS by the APCA.
While most market participants saw RTGS as a superior way to minimize settlement risk, it was initially agreed that a one-step transition to RTGS was too difficult given the many uncertainties. However, the consensus changed for several reasons. First, RTGS gained greater acceptance internationally, with many countries designing their own RTGS systems. Second, within Australia, banks became concerned about the risks and potential costs of the risk-sharing arrangements developed as part of PRESS/PDS. Third, PRESS/PDS was more complex and expensive to design and operate than envisaged. As a result, in April 1995, the RBA outlined a proposal to cease development of PRESS/PDS and to move directly to an RTGS (Reserve Bank of Australia, 1995c, pp. 47-48). The plans to proceed were confirmed in July 1995, after consultation with the banks and other interested parties.
The RTGS will require that ESAs remain in credit at all times. Liquidity-conserving facilities have been designed to ensure that general shortages of ESA funds will be avoided.68
Various payment systems are expected to settle using the RTGS system, implying an increase in ESA transactions and a need for the RTGS system to satisfy the security requirements of those payment systems. The RTGS system will be based on RITS and will continue to allow RITS members to initiate payments within strict limits controlled by their sponsoring bank. Payments that would overdraw a bank’s ESA will not be settled and will be queued, pending sufficient ESA funds. There will be a queuing mechanism that will allow banks to prioritize payments. There will also be automated features built into the RTGS system, such as bilateral offsetting of queued payments to conserve liquidity.
Plans for the interface between the various payment systems are still evolving. The low-value batch systems, such as the check clearings and POS, will continue to settle daily on a multilateral net basis at 9:00 a.m. However, in the future, there may be a desire to settle such obligations within the day across the RTGS system.
Plans regarding the RTGS system’s integration with the large-value systems have been finalized. The new system will offer complete DVP facilities for all securities settlements, regardless of whether the securities settlement operations originated from RITS or Austraclear. Funds transfer can originate from RITS, Austraclear, or a new large-value payments clearing system being developed by the APCA and SWIFT. BITS will be disbanded once the RTGS system commences operation.