The Reserve Bank in the Payments System: Its roles and responsibilites

 Last updated: August 2007

Overview

The Reserve Bank's overall goal is to promote the development of a payments system which is efficient, open and flexible; which has a high level of integrity; and which is robust in the face of financial crises.

The following notes provide details of the various roles the Bank plays in the payments system, and bring out clearly the demarcations between them. These roles are:

  1. Exchange Settlement Account (ES Account) Provider
  2. Exchange Settlement Account System (ESAS) Provider
  3. Monetary Policy Implementer
  4. System Liquidity Manager
  5. Clearing and Settlement Service Provider (NZClear)
  6. User
  7. Supervisor/Regulator

These roles cover a full range from "public policy" functions to "commercial" functions, and some have mixed attributes. The Bank aims to ensure that each role is carried out properly, and that any conflicts amongst them are managed appropriately, by:

  • Setting clear objectives for each function.
  • Assigning the functions appropriately, and ensuring that systems are in place for identifying and resolving any conflicts.
  • Maintaining transparency on the nature and conduct of each activity.
  • Consulting with customers and other external parties on both the principles and the operational practices in each area.
  • Acting fairly and in a competitively-neutral manner with respect to all actual or potential payment system participants.
  • Subjecting the arrangements to continual internal scrutiny.

ES Account provider

Objective

The Bank provides Exchange Settlement Accounts (ES Accounts) for two main reasons:

  • To make available to the private sector "high-powered money" or "outside money" or "Reserve Bank cash" which is of undoubted value, and is particularly suited to achieving certainty and finality in inter-bank settlements.
  • To provide an appropriate basis for the conduct of monetary policy.

Access

When deciding on an application for an ES account the Bank will consider the following matters:

  • Whether the applicant fits the definition of financial institution in the Reserve Bank Act 1989.
  • Whether provision of an ES account to the applicant might detract from the soundness of the financial system.
  • Whether provision of an ES account to the applicant might detract from the efficiency of the financial system.
  • Whether there is a legitimate business interest that can be served by access to an ES account.
  • Whether the provision of an ES account would adversely affect the reputation of the Reserve Bank.

Techniques

ES Accounts are basic current accounts only. The service consists of account maintenance, real-time crediting and debiting of transactions to accounts, and ancillary functions. The Bank will not offer a wider range of banking services to its ES Account customers.

Financial Arrangements

The provision of ES Accounts and Reserve Bank cash is seen primarily as an instrument of public policy, and not as a source of profit. The rate of remuneration on overnight cash balances is set as one of the parameters of monetary policy, and no commercial goal exists.

Major Responsibilities

  • The Bank will operate the ES Accounts with the highest reasonable degree of reliability and integrity.
  • Within the narrow limits of the role, the Bank will endeavour to meet any reasonable customer needs as efficiently and effectively as possible.

Other Key Features

The Bank will not accept any credit risk on ES Accounts, and overdrafts will not be permitted.

ESAS Provider

Objectives

  • The Bank operates and maintains the Exchange Settlement Account System in order to facilitate Real-Time Gross Settlement (RTGS) by financial institutions, and to operate the ES Accounts efficiently.
  • The Bank has established a legal and contractual environment for ESAS that ensures -- as far as possible -- that settlements using ESAS are final and irrevocable at the point when they occur. ESAS is a Designated Payment System which enhances transaction finality.

Access

  • Access to ESAS will be available to all holders of ES Accounts.
  • No access to ES accounts will be available other than through ESAS.

Techniques

The Exchange Settlement Account System (ESAS) is a system which is owned and operated by the Bank, and:

  • Handles the ES Account maintenance, transaction and ancillary services mentioned above.
  • Provides an electronic interface to banks, payment systems or financial institutions (as required).
  • Provides functionality for queuing, processing and rejecting transactions.

Financial Arrangements

ESAS operates on a cost-recovery basis, and transaction charges are pitched at a level which covers operating costs, and recovers the development costs (narrowly defined).

Major Responsibilities

  • The Bank endeavours to operate ESAS with the highest reasonable degree of reliability and integrity. This includes operation of an RTGS Help Desk and regular reviews of the RTGS business continuity plan. The Bank also administers contingency arrangements for participants in time critical settlements involving CLS Bank.
  • The Bank endeavours to meet any reasonable customer needs as efficiently and effectively as possible.
  • ES Accountholders (either individually or collectively or both) are responsible for their connections to the ESAS interface, and for the reliability and integrity of instructions transmitted to ESAS through those connections.

Other Key Features

  • The Bank, through ESAS, provides ES Accountholders with a reliable and efficient mechanism for settling obligations on-demand, thus enabling them to better manage their exposures.
  • The Bank will consult with ES Accountholders when changes to ESAS are being considered.
  • The Bank commissions an annual external audit report on the operations of ESAS.

Monetary policy implementer

Objectives

The Reserve Bank aims to maintain the supply and price of system liquidity at levels consistent with the Bank's monetary policy stance. The Reserve Bank uses the official cash rate (OCR) as the primary instrument for the implementation of monetary policy.

Access

In principle, access to the Bank's liquidity management "windows" (listed below) is open, subject to tests of creditworthiness (where appropriate) and minimum transaction sizes. Registered banks are the main participants, but other institutions are also sometimes involved. Use of end-of-day facilities is available only to ES Accountholders.

Techniques

The Bank maintains the amount via a number of liquidity management operations with the market including:

  • Open Market Operations (OMOs) - a daily tender involving either repo or reverse-repo of NZ Government Securities designed to either inject or withdraw cash from the banking system.
  • Foreign exchange swaps - these inject or withdraw NZD cash from the banking system in exchange for USD.
  • Bond repurchases of soon to mature NZ Government Bonds - designed to smooth out the large injection of cash to the banking system when a large tranche of NZ Government Bonds matures.

The size of these operations is based on estimates, and the market response to some operations may not be as expected.

Each morning prior to 8.30am the Bank runs an "end of day" process. All ES Accountholders must have a positive NZ cash balance in their ES account at all times. If an ES Accountholder facing a shortfall cannot borrow NZ cash from another ES Accountholder, it will need to borrow cash from the Bank via a repo of NZ Government Bonds at a yield of OCR +0.50%.

The Reserve Bank calculates interest for each account holder on a daily basis. Account holders receive the official cash rate on balances up to a maximum balance that is determined by the Reserve Bank. Balances in excess of this amount are remunerated at the official cash rate less 100 basis points. The Bank may from time to time vary this arrangement.

Financial Arrangements

  • The Bank's monetary policy operations (in a narrow sense) are not commercial or profit seeking. They are aimed at achieving monetary conditions which are in line with the monetary policy stance, and this may involve profits or losses at different times.
  • However commercial considerations are not entirely absent. In the OMO, the Bank looks to accept bids which are in line with the market. To achieve this the Bank sets either a minimum or maximum rate, depending on the instruments being used, for the OMO. There is also an underlying concern to undertake Crown cash management activities (which generate most of the OMO activity) in an efficient and cost-effective manner.

Major Responsibilities

The Bank accepts responsibility for ensuring that an adequate level of system liquidity is available.

Individual ES Accountholders are responsible for managing their own liquidity at all times.

Other Key Features

The Bank actively manages its exposures to other banks or counterparties arising from any market operations which it conducts.

System liquidity manager

Objectives

The Bank aims to manage system liquidity in a way which facilitates the efficient operation of settlement systems.

Access

  • All of the Bank's operations described in Section C have an impact on system liquidity. In this respect, access to the Bank's windows will be as described above.
  • Specific intraday operations are - by definition - conducted with ES Accountholders only.

Techniques

  • The Bank will seek to execute its (overnight) monetary policy operations in ways which are consistent with the smooth operation of the intraday market.
  • There is no target, or limit on the level of cash that the Bank will inject. Intra-day cash levels are allowed to be demand-determined -- but constrained by the definition and availability of qualifying securities under the autorepo scheme.
  • To economise on liquidity, the ESAS queuing mechanism now provides "top-down looping" to assist the settlement of transactions even when the first (or subsequent) transactions in the queue cannot be settled. In addition, ES Accountholders have the ability to remove unsettled transactions from their queue.
  • The ESAS system has the ability to help resolve any gridlocks through "auto-offset" and "freeze-frame" facilities, which can help settle transactions where there are bilateral or multilateral offsets. However, the primary responsibility for dealing with gridlocks lies with individual ES Accountholders.

Financial Arrangements

  • The Bank does not incur significant costs in operating intraday liquidity management services, and is not making any charges for these services, other than the transaction charges within the ESAS environment.

Major Responsibilities

  • The Bank accepts responsibility for ensuring that an adequate level of system liquidity is available, but reserves the right to charge interest or fees when it provides liquidity.
  • Individual ES Accountholders are responsible for managing their own liquidity at all times, and for organising, prioritising and submitting their payment instructions in order to meet their (contractual or other) obligations to one another and to their customers.
  • The Bank has the ability to examine the ESAS queues of all participants, but does not "manage" those queues in any respect.

Other Key Features

  • The Bank actively manages its exposures to other banks or counterparties arising from any market operations which it conducts.

Clearing and settlement service provider

Objectives

The Reserve Bank operates NZClear in New Zealand to:

  • Enhance the confidence of investors in the integrity of the financial system, and, particularly, the depository and electronic transfer system for securities.
  • Promote greater efficiency and soundness in NZ financial markets through direct participation in those markets.

Access

Membership of NZClear is presently restricted to entities involved in securities markets.

Techniques

  • NZClear currently offers depository, wholesale registry, securities transfer, and cash payment services.
  • New services may be added on request to fill unmet needs if those services are appropriate, contribute to the financial system's soundness and efficiency, and are likely to be profitable.

Financial Arrangements

NZClear operates on a commercial basis, and is expected to earn a reasonable profit.

Major Responsibilities

The Bank endeavours to operate NZClear with the highest reasonable degree of reliability and integrity. This includes regular review and testing of disaster recovery plans.

Other Key Features

  • In the interests of promoting the soundness of the financial system, all NZClear transactions are settled in accordance with Lamfalussy Mode 1 delivery v. payment (DVP) standards.

The services provided by NZClear are contestable.

User

Objectives

  • The Bank uses the payments system just like any other financial market participants to conduct transactions in the foreign exchange markets and the domestic markets -- both on its own account, and on account of its customers (mainly the Government).
  • The Bank aims to ensure that all of its transactions are conducted in a timely and reliable manner.
  • The Bank also aims to reduce its own exposures to counterparties through payment system risk to acceptable levels.

Scope

  • The parties which the Bank deals with are discussed in Section C above.
  • The Bank settles all high value transactions across ES accounts, via NZClear or SWIFT.

Techniques

  • As a user, the Bank will operate in most respects just like any other financial market participant.
  • The special nature of the Reserve Bank may lead to some differences in practice.
  • To reduce risk, securities transactions are conducted on a delivery v. payment (DVP) basis in RB Cash via NZClear.

Financial Arrangements

As a user, the Bank pays transaction charges just like everyone else.

Supervisor/Regulator

Objectives

The Bank's over-riding financial system objective is to encourage financial system efficiency and soundness and to reduce the damage that could arise from a bank failure or other financial system distress. The Bank also aims to minimise the risk or the perception that either the Government or the Bank may be expected to bail-out any financial institution which encounters difficulties.

Scope

The Reserve Bank of New Zealand Act 1989 specifies the oversight powers of the RBNZ on payment systems. Additional policies, standards and conditions are specified in a policy document issued in March 2015, ‘Oversight of Financial Market Infrastructures in New Zealand’ (FMI1).

Read the Oversight of Financial Market Infrastructures in New Zealand (FMI1) (PDF 100KB)

Techniques

The Bank's approach to payment system oversight is set out in FMI1, ‘Oversight of Financial Market Infrastructures in New Zealand’. This policy document broadly adopts the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI) as a basis for payment system oversight.

In addition, there is some cross-over with the Banks' banking supervision role. For example, the Bank's current bank supervision arrangements

  • Require all banks to disclose publicly their exposures to other banks (if large) and may also require them to disclose their policies for managing intra-day credit exposures and/or their policies for managing credit exposures to bank counterparties – if these differ materially from their general credit management polices, and
  • Require large banks to ensure they have continued access to systems necessary for normal business.

These rules help to provide the banks with appropriate incentives to identify, monitor and manage the payment system risks that they face.

Financial Arrangements

  • The Bank's Financial System Oversight role is regarded mainly as a public policy activity, and does not seek to meet any commercial goals.
  • The Bank does charge fees for bank registration and payment system designation, which are intended to do no more than recover the direct processing costs involved.
  • A key objective is to minimise the risk that any Government funding would be required to resolve a situation of financial distress.

Major Responsibilities

  • The Reserve Bank accepts responsibility to play its part as outlined in 3 above.
  • The Reserve Bank accepts no responsibility for the affairs or financial condition of any institution, bank or ES Accountholder. These entities are wholly responsible for their own liquidity, solvency and standards of behaviour -- and for their own assessments of the creditworthiness of their counterparties.
  • As described in Section D, the Reserve Bank undertakes to ensure that an adequate level of system liquidity is available, to enable the efficient operation of settlement systems.
  • The Bank may also have a problem-resolution role to play in the event of financial system distress or bank failure. The nature of this role will need to be determined in the light of the circumstances at the time, but it could include invoking the statutory management powers available under the Reserve Bank Act.