ESAS/RTGS overview
April 2011
What is ESAS?
Background
ESAS is the Reserve Bank of New Zealand’s Exchange Settlement Account System. ESAS came into live operation in March 1998 as part of the implementation of the New Zealand Real-Time Gross Settlement (RTGS) environment.
This changed the way banks in New Zealand settle most high value transactions, including those in the wholesale securities and foreign exchange markets. 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 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. 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. Around $30 billion a day goes through the RTGS system.
In addition to the Reserve Bank, CLS Bank and New Zealand Depository Limited, Exchange Settlement Accountholders are currently registered settlement banks. However access rules permit other organisations meeting certain criteria to have accounts as well.
In addition to ESAS itself, the RTGS environment consists of two real time systems, NZClear and the ESAS-SWIFT Interface. NZClear and the ESAS-SWIFT Interface are operated by the RBNZ. NZClear is the central securities depository that allows members of that system to submit payment requests for equities and fixed interest settlements and also cash transfers to ESAS. There is also a non-real time switch, ISL (Interchange and Settlement Limited) which represents transactions from the processing of cheques, direct debit, direct credits, automatic payments and Eftpos transactions. These payments are settled via NZClear during the morning settlement session.
What does ESAS do?
The main purpose of ESAS is to provide settlement accounts for the 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.
NZD liquidity is provided to the system by the Reserve Bank undertaking FX Swap transactions and Open Market Operations. In addition, an automated repo facility is available to certain counterparties at a fixed margin above the official cash rate.
The ESAS system also has an operation called Freeze Frame which is run every hour and will settle all settlement requests within the ESAS system if it means that 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.
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. The one exception to this is over a weekend when the system closes at 4am Saturday morning and re-opens at 4am Monday morning.
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9.00am |
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4.45pm |
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5.00pm |
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7.00am |
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7:30am |
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8.30am |
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