ESAS/RTGS overview

July 2012

What is ESAS?

Background

ESAS is the Reserve Bank of New Zealand's Exchange Settlement Account System which is used by banks and other approved financial institutions to settle their obligations on a Real-Time Gross Settlement (RTGS) basis. ESAS came into live operation in March 1998 as part of the implementation of RTGS in New Zealand.

ESAS is operated by the Reserve Bank's Financial Services Group.

In RTGS, final and irrevocable settlement of transactions is achieved in real-time by the simultaneous crediting and debiting of Exchange Settlement Accounts (ESAs) held at the Reserve Bank.

Previously, at the end of the day banks tallied up all their inter-bank obligations, and then settled net amounts with each other through their accounts at the Reserve Bank. However, with RTGS, individual settlement requests between banks are settled electronically as the settlement requests happen.

RTGS was introduced to reduce the settlement risk associated with deferred high- value interbank payments. It makes the financial system as a whole more robust. Previously, if a bank collapsed during the working day, other banks could have been owed very large sums of money from incomplete settlement requests with the failed bank. This could potentially put these other banks at risk, or have seen banks attempt to reverse payments, creating financial chaos.

However, with RTGS, large payments are completed transaction-by-transaction throughout the day, and are posted irrevocably to banks' accounts at the Reserve Bank before value is credited/debited to customers.

ESAS is a designated settlement system under Part 5C of the Reserve Bank Act 1989. Designation also gives legislative backing to the finality of settlements effected in accordance with the rules of the system. The Reserve Bank's Prudential Supervision Department is the regulator of the system. Controls are in place to ensure that the Reserve Bank's Financial Services Group and Prudential Supervision Department operate at arm's length.

Thus, RTGS markedly reduces the risk that the collapse of one bank would lead to the collapse of others, or to attempts to reverse settlement requests. Transactions with an aggregate value of about $25 billion are processed through the RTGS system each day.

Each ESAS accountholder has an ESA with the Reserve Bank. The operation of those accounts is governed by the Exchange Settlement Account System Terms and Conditions (PDF 78KB).

Current ESAS accountholders include several registered banks, the Reserve Bank, CLS Bank and New Zealand Depository Limited However access rules permit other organisations meeting certain criteria to have accounts as well.

Accountholders submit transactions to ESAS through a number of feeder systems (known as "authorised submitting systems"). The feeder systems include:

  • NZClear, New Zealand's central securities depository and principal securities settlement platform for the financial services industry. The Reserve Bank is the system operator of NZClear.
  • the ESAS-SWIFT Interface using the SWIFT Y copy protocol for a closed user group administered by the Reserve Bank; and
  • the Settlement Before Interchange (SBI) interface. This service settles the transactions submitted to ESAS in respect of files containing retail transactions between bilateral pairs of accountholders. Once the transaction is settled in ESAS, the associated file of retail transactions is released to the destination bank. The SBI service involves a closed user group administered by Payments NZ Limited. SBI utilises SWIFT FileAct and SWIFT Y copy.

What does ESAS do?

The main purpose of ESAS is to provide ESAs for the final and irrevocable settlement of all real time payments. There are no overdrafts permitted on these accounts.

The settlement request queuing algorithm used within the ESAS system is Next Down Looping, where the settlement process starts at the top of the queue and continues down the queue settling any settlement requests where an Accountholder has sufficient funds. Accountholders also have access to Auto Offset functionality, which is the process of searching the payment queue for eligible settlement requests that, if settled simultaneously, would allow an initiating settlement request to settle. This test is applied if an Accountholder has insufficient funds to settle an authorised payment instruction. Auto Offset is bilateral – the system will only consider simultaneous settlement of a transaction (the initiating transaction) between two parties, and one or more transactions (the offsetting transaction(s)) between the same two parties. This means that settlement requests may not necessarily settle in the order that they were received by the ESAS system.

The ESAS system also has an operation called Freeze Frame which is run periodically or at the Reserve Bank's instigation. Freeze Frame will settle all settlement requests within the ESAS system if as a result of settlement no accounts will go below their minimum allowed balance. If one account will go below its minimum allowed balance then no settlement requests will be settled. Accountholders also have access to authorisation functionality where they can have all settlement requests either authorised or not authorised or they can set limits for settlement requests that can be settled and settlement requests that require authorisation. Accountholders also have the ability to de-authorise any authorised settlement requests.

NZD liquidity is provided to the New Zealand financial system by the Reserve Bank undertaking FX Swap transactions and Open Market Operations. In addition, an automated overnight repo facility is available to certain counterparties at a fixed margin above the official cash rate.

ESAS system operating times – An ESAS day

The ESAS system is available to process settlement requests for approximately 23 hours and 30 minutes per business day and all day on weekends. Because a banking day concludes at 8.30 a.m. the following business day, transactions processed on a weekend will be for value the preceding business day (i.e. generally the preceding Friday).

9.00am

  • Start of day – ESAS open to accept settlement requests.
  • NZClear, ESAS/SWIFT Interface and SBI Interface open to send and receive settlement requests.

4.45pm

  • Last time that ESAS will accept cash transactions submitted from NZClear for NZClear members who are not ESAS accountholders.
  • ESAS/SWIFT interface continues to operate until End of Day.

5.00pm

  • ESAS will again start accepting transactions submitted from NZClear (only NZClear Members who are ESAS Accountholders).
  • ESAS continues to be available for transactions submitted via the ESAS-SWIFT and SBI Interfaces.
  • Note: while ESAS continues to operate continuously, RTGS Helpdesk support ceases from the scheduled end of processing for SBI transactions (1.15 am).

7:30am

  • RTGS Helpdesk support commences.

8.30am

  • End of day processing for ESAS and NZClear. ESAS Systems closed for 30 minutes.
  • The ESAS/SWIFT Interface stops receiving settlement requests.