6 December 2002
Austraclear System: Hours of availability
The purpose of this letter is to:
a) outline for Austraclear members what changes to the Austraclear hours of availability need to be considered as a result of the inclusion of the New Zealand Dollar (NZD) as a CLS currency. These changes are likely to affect most Austraclear members and settlement banks.
b) outline the process that the Reserve Bank wishes to follow with respect to determining the impact that inclusion of the NZD in CLS will have on the hours of availability of the Austraclear and ESAS systems.
c) provide you with the opportunity to nominate a representative to be selected to participate in a small industry working group to discuss the hours of availability for Austraclear in a CLS environment.
This paper has been written to provide information to Austraclear members and to stimulate discussion of the issues that will need to be addressed and to encourage parties to comment on these implications.
Clearly any changes to the hours of operation for those systems will potentially have a significant impact on settlement activity, intra-day flows and members' resourcing. Accordingly we ask members to carefully read this paper and provide input to this process.
1. What is CLS and what does it achieve?
Continuous Linked Settlement (CLS) is a real-time, global settlement system for foreign exchange (FX) transactions. Currently different legs of foreign exchange transactions are settled many hours apart because of time zone differences. For example settlement of the USD leg of a NZD:USD FX transaction will not occur until some 18 hours after the NZD leg has been settled. This exposes the recipient of the USD (who has paid away their NZD) to significant intra-day risk that their USD will not be received because for example their counterparty or the counterparty's USD agent bank fails that day after the NZD have been paid.
CLS Bank substantially reduces this very significant risk to financial systems by linking the RTGS systems for various currencies and ensuring that both legs of FX transactions are settled simultaneously. In order to achieve simultaneous settlement of currencies in different time zones, the hours of operation of various RTGS systems will have to change. In the case of the NZD, ESAS will need to be open in the late evening to process the NZD leg of FX transactions and in the case of the USD, their RTGS system (Fedwire) is now open in the early hours of the morning.
CLS went live with the first seven currencies in September 2002 - USD, Euro, JPY, GBP, SFR, CAD and AUD.
It is planned that the NZD be admitted to the CLS system in 2004. We do not have a precise date yet as, among other things, a legislative change is required in New Zealand before the NZD can be admitted to the CLS system. Nevertheless the Reserve Bank and banks involved in FX settlements are proceeding with the preparatory work required in order to facilitate processing of the NZD in a CLS environment.
A more detailed description of CLS can be found on the web page:
2. The implications of CLS for Securities Settlements
Once the NZD is included in CLS Bank, the majority of NZD FX settlements will occur on a payment versus payment basis within a three hour processing window between 5.00pm and 10.00pm, depending on the time of year and the respective NZ and European summertime changes. General failure management scenarios may extend the range of NZD settlement out to midnight NZ time (or later in extraordinary circumstances).
Clearly ESAS will need to be available until late in the evening in order to accommodate CLS Bank's processing of NZD cash payments.
There will be consequential impacts for the hours that the Austraclear system will be available for following reasons:
Foreign investors drive a significant amount of the daily settlement activity for the sale and purchase of fixed interest securities and equities. Purchases by those institutions (many of which use the services of local nominee companies) are to a significant extent funded by the receipt of the NZD leg of FX transactions. In a CLS environment those NZD will not arrive until the evening, whereas currently those funds arrive during the business day. If NZD funds are not received until the evening, in the absence of any pre-funding of purchases or the extension of credit by local banks of those purchasers, it is likely that settlement of the purchase of securities will not occur until the evening, that is after the receipt of the NZD.
This is a significant issue because foreign investors are responsible for a large proportion of daily settlements and therefore provide significant liquidity to our capital markets. If their settlements are unable to proceed until the evening there may well be down-stream implications for on-shore investors' settlements (most particularly where the seller of securities is an on-shore participant in Austraclear).
3. Possible implications for hours of operation
In appendix 1 we show a chart which illustrates what the hours of system availability are for each type of settlement and what they might be after CLS is introduced. We stress that this is a "straw-man" proposition for discussion purposes. As we indicated in the next section this straw-man will be used as the starting point for discussion by an industry working group.
Nevertheless, the illustration does show that CLS could result in a very significant change to the hours of operation.
You will notice that in the illustration Austraclear will be available for fixed interest settlements until late evening NZ time.
The illustration also shows that the Austraclear system will be available to support late evening processing of equity settlements. This could be achieved if the relevant registries cut off processing late in the evening (ie. registries accept uplifts and lodges particularly for broker to client activity, later submission of elections such as DRP, supplementary dividends).
While the Austraclear system could be available for the hours illustrated in the attachment, the industry could decide to restrict activity to certain hours and adopt a convention of earlier cut-off times for particular types of transactions. Members who complete their settlement activity for the day will be able to conclude operations before the closure of the Austraclear system in the late evening, however we note that their ability to conclude activity may be dependent on their counterparties' activities.
Even though appendix 1 is illustrative, it does demonstrate that the impact of CLS on the hours of operation for settlements is significant.
Please note that in appendix 1 we have dispensed with the interim end of day process at 7pm- tasks undertaken at that time will from late 2003 be included in the final end of day process at 8.40 the next morning.
4. The Way Forward
As highlighted above, the inclusion of the NZD in CLS will change the hours of availability of the Austraclear systems in respect of member access to system functionality.
At the November 2002 Austraclear Usergroup meeting it was agreed that a small industry working group be established to consider the impact of the inclusion of NZD in CLS on the Austraclear hours of operation and access to functions.
Having received the working groups' and members' views the Reserve Bank will then make a decision as to what the hours of operation will be for the various Austraclear modules.
We would like to see banks, custodians, NZSE and representatives from other member interest groups such as brokers and fund managers participate in the working group. The attached form provides you with the opportunity to nominate a representitive from your organisation to be selected for the working group. It is our desire to have a working group of up to 10 people. Having received nominations the Reserve Bank will make appointments to the working group which we expect will meet two or three times and also have two or three conference calls.
While not all members will attend working group meetings, all minutes and discussion documents will be circulated to all members on a timely basis and all members will have the opportunity to provide input via the Reserve Bank or another member who is on the working group.
Your nomination for the working group should reach us no later than 16 December 2002. We would also welcome any preliminary comments you may have.
In terms of timing we expect that we will appoint people to the working group by 20 December 2002 and the group will commence its work in mid to late January 2003.
Mike Wolyncewicz
Chief Financial Officer
DDI (04) 471-3826
Email: wolyncewiczm@rbnz.govt.nz
Appendix 1
Fax to: Mike Wolyncewicz
Reserve Bank of New Zealand
(64) (4) 471 3834
Email: wolyncewiczm@rbnz.govt.nz
From: [Name]
Of: [Company]
Date: December 2002
I nominate [Name of person]
Whose contact details are:
[Company]
[Postal address]
[Email address]
[Phone number]
For membership of the Austraclear hours of Operation Working Group (refer to letter from Reserve Bank of New Zealand dated 6 December 2002).
[Signature]
