Exchange Settlement Account Policy

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process. This document outlines the Reserve Bank's policy on ESA eligibility; and provides additional information on management of an ESA and the application process.

1. Eligibility to apply for an Exchange Settlement Account

ESAs are used for the settlement of obligations from the clearing process. An applicant for an ESA must be:

• an authorised deposit-taking (ADI) or other institution that is an actual or prospective provider of third-party (customer) payment services with a need to settle clearing obligations with other providers; or
• an Australian-licensed central counterparty (CCP) or securities settlement facility (SSF) (or a related body corporate acceptable to the Reserve Bank) with payment arrangements that require Australian dollar settlement.^[1]

ESAs must be used by the following types of institution:

• all ADIs with aggregate wholesale RITS real-time gross settlement (RTGS) transactions (i.e. Austraclear and SWIFT PDS transactions and RITS cash transfers) that constitute 0.25 per cent or more of the total value of wholesale RITS RTGS transactions for the settlement of Australian dollar obligations;
• any Australian-licensed CCP that the Reserve Bank determines to be systemically important in Australia must settle Australian dollar margin-related receipts or payments, and the CCP's Australian dollar securities- or derivatives-related obligations, across an ESA in its own name, or that of a related body corporate^[2] acceptable to the Reserve Bank.^[3] If the Reserve Bank determines that a CCP has become systemically important subsequent to being granted a clearing and settlement (CS) facility licence, the CCP would be expected to present the Reserve Bank with a plan and timetable for meeting its requirements under this policy within six months of the determination; and
• any Australian-licensed SSF that the Reserve Bank determines to be systemically important in Australia, and that faces Australian dollar liquidity risk from securities settlement related activities must hold an ESA in its own name, or that of a related body corporate acceptable to the Reserve Bank, in order to manage its Australian dollar liquidity. If the Reserve Bank determines that an SSF has become systemically important subsequent to being granted a CS facility licence, the SSF would be expected to present the Reserve Bank with a plan and timetable for meeting its requirements under this policy within six months of the determination.

An ADI with aggregate wholesale RITS RTGS transactions that constitute less than 0.25 per cent of the total value of wholesale RITS RTGS transactions may settle its RTGS transactions using an agent or may apply for its own ESA to settle some or all of its transactions.^[4] 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 and/or effectiveness of the RTGS services provided by its agent are compromised.

Any ADI intending to act as an agent for RTGS payments for the first time will need to seek prior approval (in the form of a non-objection) from the Australian Prudential Regulation Authority (APRA) and notify the Reserve Bank. In addition, any ADI that intends to operate its own ESA for the first time must also seek approval (in the form of a non-objection) from APRA.

The above are the criteria for eligibility to make an application for an ESA for the settlement of clearing obligations. Approval to hold and operate an ESA is at the discretion of the Reserve Bank, which may decline an application if it determines that the applicant does not satisfy the requirements in sections 2 and 3 or that the provision of an ESA to the applicant would, in the Reserve Bank's view, adversely affect the reputation of the Reserve Bank.

2. Management and Use of an Exchange Settlement Account

2.1 Operational and other requirements

ESAs are operated through the Reserve Bank Information and Transfer System (RITS). All successful applicants for an ESA must become a member of RITS and meet its operating conditions and charges. Details of these requirements will be provided to applicants.

For any institution settling transactions across its own ESA, responsibility for the account rests with management located in Australia. Such institutions must also maintain sufficient resources in Australia to ensure that the institution is always able to authorise, execute and settle RTGS transactions in an efficient and timely way.

Holders of a CS facility licence issued under Part 7.3 of the Corporations Act 2001 may be eligible to apply for an exemption from the requirement to maintain management and resources in Australia, subject to having appropriate management and operational resources in an approved offshore location. Such exemptions would be determined on a case-by-case basis, at the Reserve Bank's discretion, and would be reviewed periodically.

A CCP or SSF (or related body corporate) applying for an ESA must satisfy the general eligibility criteria for ESA holders set out above, including membership of RITS. If an ESA is granted, the CCP or SSF will be subject to operational and other requirements placed on ESA holders by the Reserve Bank.

Any ESA holder that acts as an agent for settling RTGS payments will be required to provide regular reporting to the Reserve Bank of the payment flows that it settles on behalf of other institutions.

An ESA must be maintained in credit at all times. The Reserve Bank may revoke an ESA if a holder is unable, or likely to become unable, to meet this condition or any other requirements on the account.^[5] Importantly, the Reserve Bank does not guarantee that an ESA holder will be able to meet its settlement obligations.

2.2 Special conditions

The Reserve Bank may impose operational conditions or other requirements on ESA holders at its discretion. An ADI that can satisfy the Reserve Bank that it has the capacity to meet its settlement obligations, may generally operate its ESA without special conditions. Other institutions may be approved by the Reserve Bank to operate an ESA for specified purposes.

An institution that is not supervised by APRA, or that has limited access to liquid assets, and that operates in deferred net settlement systems or that has time critical payment arrangements may need to meet liquidity requirements on an ongoing basis.

Where they apply, liquidity requirements will generally be set in relation to an institution's maximum expected net settlement obligations. Liquidity requirements may be met by overnight ESA balances or securities such as those eligible for repurchase agreements at the Reserve Bank open market operations, and other assets determined by the Reserve Bank at its discretion. The Reserve Bank may require an ESA holder to provide regular information on its payments system activities to assist in monitoring the adequacy of any ESA balances or collateral.

Holders of CS facility licences that have been granted an exemption from the requirement to maintain management and resources in Australia will be required to meet additional operating conditions relating to that exemption. If the CS facility licensee does not meet the conditions, the exemption could be withdrawn.

The Reserve Bank may impose other conditions or requirements on ESA holders on a case-by-case basis.

3. Application for an Exchange Settlement Account

Prospective applicants are strongly encouraged to contact the Reserve Bank at an early stage to discuss their interest in obtaining an ESA. This will allow matters relevant to the application to be identified earlier in the process.

An institution applying to hold and operate its own ESA must provide a complete and accurate description of the relevant aspects of its business operations in a level of detail satisfactory to the Reserve Bank. An applicant's description of its business model and operations must include information about the types of customers it has and types of activity that it provides payment services for, and must be accompanied by:

• its most recent audited financial statements (or, if it does not have its own financial statements audited, its most recent unaudited financial statements and the most recent audited financial statements of the corporate group of which it is part); and
• an attestation in a form acceptable to the Reserve Bank signed by an appropriate senior officer or executive that the applicant complies with all applicable laws in Australia and in any other jurisdiction in which it provides payment services.

An institution applying to hold and operate its own ESA must also demonstrate the following:

1. financial resources and skills consistent with its actual and anticipated payments business and the resulting settlement obligations. An applicant must submit a business plan, liquidity policy, balance sheet and projected financial statements for the first three years of operation after the date of application. The business plan should explain the applicant's payment flows and show, in each of the relevant payments clearing arrangements:

   1. expected gross daily payment flows, both routinely and during predictable ‘peak’ periods;
   2. expected net settlement obligations, both routinely and during predictable ‘peak’ periods;
   3. sources of liquidity to settle routine and predictable ‘peak’ payment obligations; and
   4. sources of liquidity (and its terms) available to settle payment obligations in times of unpredictable pressures.

2. the operational capacity to operate and manage its ESA, as well as an adequate understanding of the operational requirements needed to support its payment operations and use of an ESA, and competence in designing and implementing operational arrangements. This includes:

   1. capacity and capability (for both staffing arrangements and information technology) to support the management of its ESA and operations in RITS; and
   2. the ability to meet the location requirements set out in section 2.

3. appropriate liquidity arrangements to settle obligations arising from its payment services, as well as an adequate understanding of liquidity management requirements and competence in defining and implementing any required liquidity arrangements. Appropriate liquidity arrangements will include:

   1. access to adequate exchange settlement (ES) liquidity to meet its anticipated routine and ‘peak’ period settlement obligations in a timely manner (for participation in deferred net settlement and other time critical payment arrangements);
   2. access to adequate intraday ES liquidity to settle obligations in a timely manner, such that it does not unreasonably impinge on other participants or reduce the efficiency of the system (for RTGS payments); and
   3. that any collateral or guarantees to be relied upon, especially in times of unpredictable stress, are adequate to meet its obligations. The applicant will also have to explain how it proposes to convert these to ES funds in a timely fashion.

4. whether there are any loss-sharing arrangements under which other members of the clearing stream assume the settlement obligations of the applicant if it cannot meet them. The terms of any such arrangements must be clearly set out. (In any loss-sharing arrangement, the applicant may also incur settlement obligations as a result of the failure of another member. Where relevant, the applicant must identify these potential obligations and how they would be met.)

5. appropriate business continuity arrangements, as well as an adequate understanding of and competence in designing and implementing required business continuity arrangements. Appropriate business continuity arrangements will include:

   1. a business continuity plan that incorporates the proposed RITS operations; and
   2. compliance with the Business Continuity Standards for RITS members.

6. an adequate understanding of the impacts that its operational, liquidity management and business continuity arrangements have on other RITS members.

7. a sufficiently developed risk culture in its business and operations. This includes:

   1. processes around developing and maintaining key policies (e.g. liquidity and business continuity policies);
   2. appropriate reporting lines; and
   3. the ability to meet corporate governance requirements for RITS members.

An ADI applying to hold a dormant ESA must provide basic information on financial standing, payment flows and risk controls, in a format advised by the Reserve Bank at the time of application.

The Reserve Bank may commission a report relating to the conduct and standing of one or more of the following in relation to an applicant: the applicant itself, directors, key management personnel, shareholders and other related entities. If such a report is commissioned and the applicant is successful in obtaining an ESA, an amount equal to the cost of this report will be payable by the applicant as an approval fee.

The Reserve Bank may require an applicant to obtain (at its own cost) a report from an independent expert approved by the Reserve Bank assessing the applicant's policies and procedures related to sanctions and to anti-money laundering and counter terrorism financing (AML/CTF) and the applicant's compliance with sanctions and AML/CTF legislation and other regulatory requirements. If the Reserve Bank requires such a report, the scope, and any qualifications and assumptions contained in it, would need to be satisfactory to the Reserve Bank (in its sole discretion) and the report would need to be one on which the Reserve Bank is entitled to rely.

Prospective applicants should contact the Reserve Bank (rits@rba.gov.au or 1800 659 360) for more information on the application process and requirements.

Applications for an ESA should be addressed to: