1Reserve Bank of New Zealand: ESAS System Annual Report 2015

Exchange Settlement Account System (“ESAS”)Report to Account Holders

Year ended 30 June 2015

Reserve Bank of New ZealandAugust 2015

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2 Reserve Bank of New Zealand: ESAS System Annual Report 2015

Table of contents

System overview 3

Management commentary 4

Key statistics 5

Risk management 7

Financial performance 8

Plan for 2015-16 9

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Exchange Settlement Account System (ESAS)

System Operator: Reserve Bank of New Zealand

Email: rtgshelpdesk@rbnz.govt.nz

Telephone: (64) (4) 471 3918

Fax: (64) (4) 471 3712

Website: www.rbnz.govt.nz/markets_and_payment_operations/esas/

ISSN

Copyright © 2015 Reserve Bank of New Zealand

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3Reserve Bank of New Zealand: ESAS System Annual Report 2015

System overview

About ESASESAS is New Zealand’s principal high-value payments system which is used to settle payment instructions

between accountholders. The system is charged with providing an efficient and safe process for the real time

electronic settlement of payments between accountholders.

The Reserve Bank has provided ESAS as a real-time gross settlement system since 1998.

Accountholders electronically submit instructions to debit an account and credit another account using an

authorised electronic submitting mechanism. Authorised submitting mechanisms include closed user groups

which utilise the SWIFT electronic messaging system, the NZClear system and direct entry of transaction

details to ESAS. The system is available for use by accountholders for 23.5 hours each business day. Each

business day commences at 9.00am on a working day and ends at 8.30am the following working day.

A payment will be settled (i.e. funds are transferred from one ESAS accountholder’s exchange settlement

account to another ESAS accountholder’s exchange settlement account) once a transaction instruction is

authenticated, the payment instruction is authorised by the payer and the payer has sufficient funds in their

exchange settlement account to effect the transaction. Once a transaction is settled it cannot be revoked.

The ESAS system is operated by the Reserve Bank. The Reserve Bank’s Financial Services Group

(“FSG”) is responsible for the administration of the operational aspects of the system. FSG is headed by

Mike Wolyncewicz, the Reserve Bank’s Chief Financial Officer, and day-to-day business support is provided

by the Payment and Settlement Services Team within FSG that is managed by the Manager of Payments

and Settlement Services, Nathan Lewer.

FSG reports on the operation of ESAS to Geoff Bascand, Deputy Governor and Head of Operations.

The Reserve Bank’s Knowledge Services Group (“KSG”) supports the telecommunications network and

related security features utilised by the system. Software support, software development and operational

support services are provided by Datacom Systems (Wellington) Limited (“Datacom”).

The aggregate level of liquidity in the ESAS system is managed by the Reserve Bank’s Financial Markets

Department (“FMD”). FMD injects or withdraws liquidity from the system by undertaking transactions such as

reverse repurchase agreements, foreign currency swap transactions, and issuance of Reserve Bank Bills.

FMD’s objective is to ensure that there is adequate aggregate liquidity in the system to ensure the efficient

operation of payment operations while also maintaining short-term wholesale interest rates at levels close

to the Official Cash Rate. Typically aggregate system liquidity is maintained in the range of $7 billion to $9

billion.

ESAS is a designated settlement system under Part 5C of the Reserve Bank Act 1989. The regulator

is the Prudential Supervision Department of the Reserve Bank. Institutional arrangements are in place to

ensure that dealings between the Financial Services Group and the Prudential Supervision Department

occur on an arm’s length basis.

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4 Reserve Bank of New Zealand: ESAS System Annual Report 2015

Management commentary

Year ended 30 June 2015Key performance statistics are:

Key performance indicator 2015 2014

• System availability (%) 99.87 99.78

• Average daily transactions 11,332 10,443

• Revenue ($000) 4,038 3,162

Customer satisfaction - meets

or exceeds expectations (%) 100 100

Finance and operationsESAS is operated on a cost recovery basis. Expenditure and therefore charges to accountholders

increased largely as a result of project costs associated with the strategic review of the Bank’s settlement

operations including the proposed replacement of ESAS, and also additional amortisation charges due to a

reassessment of the useful life of system software in light of the proposed replacement of ESAS.

The Bank continues to maintain the system, and as indicated in business plans in recent years, there

is a limited programme for developing system functionality. An important development this year was the

successful delivery of a replacement interface between both ESAS and NZClear systems and the SWIFT

network. This was a significant project undertaken to replace software which was deployed in 2001 and

which the vendor advised would no longer be supported. The capital cost of this project is being amortised

over a relatively short period of three years, and has contributed to the increase in operating costs.

The system was available to users 99.87% of core hours. This measure does not differentiate matters

beyond the Bank’s control such as internet outages and availability was 99.91% excluding matters beyond

the Bank’s control. The Bank aims to deliver the system with 99.90% availability.

The Bank has prepared a draft assessment of ESAS’s compliance with the principles for Financial

Market Infrastructures. The Bank is considering the regulator’s feedback on that draft and plans to publish

the self-assessment in September 2015.Arch

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5Reserve Bank of New Zealand: ESAS System Annual Report 2015

Strategic DevelopmentsDuring 2014/15, the Bank completed its strategic review of its payment operations activities and reported

back to stakeholders. This included stating the Bank’s vision, principles, and core requirements for operations

that the Bank is responsible for.

One of the key findings of the review is that providing securities settlement and depository services

is not a core central bank function. Additionally, the Bank’s payment and settlement systems, ESAS and

NZClear, will require significant investment or replacement over the next several years. Therefore the Bank

has decided to replace ESAS and to divest the NZClear business if another specialist operator can provide

securities settlement and depository services that meet both the Bank’s operational requirements and users’

needs.

The search for a new system to replace ESAS is well advanced. Accountholders will be kept apprised of

progress and the Bank will ensure members have the opportunity to comment on the planned procurement

before a decision is made.

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6 Reserve Bank of New Zealand: ESAS System Annual Report 2015

Key statistics

Transactions – All

There are three primary interfaces or “Accountholder Submitting Systems” which are used by ESAS

Accountholders to submit payment instructions to ESAS:

• directly from the NZClear system.

• via the SWIFT system where members of the Assured Value Payment “AVP” closed user group use

ESAS to pay other members of that closed user group. The Reserve Bank is the administrator of the AVP

closed user group.

• via the SWIFT system where members of the Settlement Before Interchange “SBI” closed user group

use ESAS to pay other members of that closed user group. Payments NZ Limited is the administrator of

the SBI closed user group. Once an SBI settlement has been effected in ESAS, a confirmation is sent

to SWIFT which then allows an associated interchange file containing underlying payment details to be

released to the destination bank.

• There is steady growth in the volume of

transactions submitted to ESAS. After several

years of subdued growth post the global financial

crisis, average daily values of transactions

increased quite markedly from $25.9 billion to

$29.3 billion.

Transactions – Sourced from SWIFT “AVP”

• Transactions submitted to ESAS via the main

SWIFT closed user group known as “AVP”

dominate overall ESAS activity, both in terms

of volumes and values. Transaction numbers

are growing at a steady rate and the average

daily value of AVP transactions appear to also

be increasing.

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7Reserve Bank of New Zealand: ESAS System Annual Report 2015

2011 2012 2013 2014 2015Application – all users

1:58 1:36 1:20 0:07 0:00

Application – subset of all users

1:22 0:50 4:45 8:32 5:30

Connectivity 0:02 0:00 0:00 0:00 0:00

System outages year ended 30 June (hours: mins) • The system was available 99.87% during

core support hours (2014: 99.78%).

• There were two main outages totalling

306 minutes, but due to affecting a

subset of users only, the business impact

of these incidents was very limited as

alternate processing methods were able

to continue. All incidents are followed up

through post-incident analysis in order to

minimise the chance of recurrence.Customer satisfaction

• The 2015 annual customer satisfaction

survey showed that customer satisfaction

remains at a high level.

• Members provided feedback on the

limited system flexibility and complexity

of development.

2011 2012 2013 2014 2015Exceed expectations

89% 82% 79% 81% 74%

Meet expectations

11% 18% 21% 19% 26%

Does not meet expectations

0% 0% 0% 0% 0%

100% 100% 100% 100% 100%

Transactions – Sourced from SBI

Transactions –Sourced from NZClear

• The SBI interface to ESAS commenced

operation in February 2012. Volumes are

growing steadily as banks submit more files to

ESAS during the banking day.

• Transactions sourced from the NZClear system

reflect high NZClear turnover in recent years

which results from high activity on the New

Zealand share market.

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8 Reserve Bank of New Zealand: ESAS System Annual Report 2015

Risk management

The internal controls of the ESAS system are audited each year by PricewaterhouseCoopers (“PwC”), as

required by the ESAS Terms and Conditions. PwC act on behalf of the Reserve Bank’s external auditor, the

Auditor-General. The scope of this audit includes the controls performed by the Reserve Bank’s third party

independent service provider, Datacom. The Auditor’s annual assurance report is addressed to the Governor

of the Reserve Bank and is reviewed by the Reserve Bank’s Audit Committee, with external auditors, Reserve

Bank governors and management in attendance. A copy of the assurance report is sent to accountholders,

and is published on the Bank’s website.

ESAS is also subject to internal audit by the Reserve Bank’s Audit Services division.

The main elements of risk management for the System entail:

• procedures and controls are adhered to;

• measures to manage operational risk, as described below;

• business continuity plans are in place and tested regularly; and

• ongoing oversight and audit of operations.

Managing operational risk in the Reserve Bank is seen as an integral part of day-to-day operations.

Operational risk management includes Bank-wide corporate policies that describe the standard of conduct

required of staff, a number of mandated requirements (e.g. a project management template), and specific

internal control systems designed around the particular characteristics of various Reserve Bank activities.

The Reserve Bank has a small office in Auckland. As a result, day-to-day operating activities are shared

between staff based in Auckland and those based in Wellington. Staff in the Auckland office will provide

on-going continuity of business operations should a region-wide disaster impact ESAS’s Wellington staff. A

second computer site is located in Auckland and is used alternately with the Wellington computers for live

production.

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9Reserve Bank of New Zealand: ESAS System Annual Report 2015

Financial performance

A short-form Statement of Financial Performance for the ESAS business is:

2015 2014

$000 $000

Revenue 4,038 3,162

Expenses 4,002 3,128

Net profit 36 34

As noted above, the Bank incurred higher costs in respect of the ESAS system due to higher amortisation

charges and also costs associated with the Payment Systems Replacement project. The current system is

complex and is nearing the end of its economic life. The majority of expenditure is incurred on system support

required to maintain the software, ensuring it continues to operate at the high level of availability and security.

The ESAS business is attributed costs by the Reserve Bank. This includes charges for use of the

Reserve Bank’s resources, such as staff, occupancy, internal audit, governance, accounting and information

technology. Indirect costs incurred by the Reserve Bank are allocated to the ESAS System based on

estimated costs that the business would incur on a stand-alone basis.

The ESAS business is operated as a division of the Reserve Bank. The above figures are extracted from

the Reserve Bank’s audited financial statements, but the accounts of this division have not been subject to a

separate external audit. Income and expenditure for the ESAS business is calculated using the accounting

policies specified in the Reserve Bank’s financial statements.

Under the ESAS terms and conditions, the Bank may only recover the costs of operating the system. The

small net profit recorded reflects project costs related to the SBI development which were expensed in earlier

years for financial reporting but which are being recovered via fees charged over 5 years.Archive

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10 Reserve Bank of New Zealand: ESAS System Annual Report 2015

Plan for 2015-16ESAS’s plan for the Year Ended 30 June 2016

The following project work is planned:

• Continue work on enhancing system security.

• Undertake a maintenance approach to enhancements, allowing scope to fine tune daily operations

(continuous process improvement).

• Continue the Payment Systems Replacement project, with a view to procuring a new RTGS system and

commencing implementation in 2016.

• Publish a self-assessment for ESAS against the Principles for Financial Market Infrastructures.

As part of business as usual we will target to:

• Have the system available for members for at least 99.90 percent of core business hours.

• Have the system subject to an external audit.

• Survey accountholders’ satisfaction levels and report back to accountholders by May 2016.

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