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

System overview
Management commentary
Key statistics
Risk management
Financial performance
Plan for 2015-16
Exchange Settlement Account System (ESAS)
System Operator: Reserve Bank of New Zealand
Email:
Telephone: rtgshelpdesk@rbnz.govt.nz
(64) (4) 471 3918
Fax: (64) (4) 471 3712
Website: www.rbnz.govt.nz/markets_and_payment_operations/esas/
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Copyright © 2015 Reserve Bank of New Zealand
Reserve Bank of New Zealand: ESAS System Annual Report 2015
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ESAS 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.
Reserve Bank of New Zealand: ESAS System Annual Report 2015 3

Key performance statistics are:
Key performance indicator 2015
• System availability (%)
• Average daily transactions
• Revenue ($000)
Customer satisfaction - meets
or exceeds expectations (%)
99.87
11,332
4,038
100
2014
99.78
10,443
3,162
100
ESAS 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.
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During 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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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.
Transactions – All
• 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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Transactions – Sourced from SBI
• 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 NZClear
• Transactions sourced from the NZClear system reflect high NZClear turnover in recent years which results from high activity on the New
Zealand share market.
2011 2012 2013 2014 2015
1:58 1:36 1:20 0:07 0:00 Application – all users
Application – subset of all users
Connectivity
1:22 0:50 4:45 8:32 5:30
0:02 0:00 0:00 0:00 0:00
• 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.
2011 2012 2013 2014 2015
89% 82% 79% 81% 74% Exceed expectations
Meet expectations
11% 18% 21% 19% 26%
Does not meet expectations
0% 0% 0% 0% 0%
100% 100% 100% 100% 100%
• 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.
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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.
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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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A short-form Statement of Financial Performance for the ESAS business is:
Revenue
Expenses
Net profit
2015 2014
$000 $000
4,038 3,162
4,002 3,128
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.
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ESAS’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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