The Reserve Bank of New Zealand (RBNZ) has released a second round of consultation on its review of its access policy and criteria for participation in its Exchange Settlement Account System (ESAS). The consultation paper proposes access criteria that, in principle, would open access to ESAS to participants other than registered banks, such as non-bank deposit takers and payment service providers.
This consultation will be of interest to any businesses considering applying for ESAS access.
Submissions on the consultation close on 18 November 2024.
Background
ESAS is a real-time gross settlement system, providing irrevocable settlements on a gross basis. ESAS is the system settling payments between banks and other financial institutions and is owned and operated by the RBNZ. ESAS is designated as a systemically important pure payment system under the Financial Markets Infrastructures Act 2021 (FMI Act).
In recent years, the RBNZ has been receiving an increasing number of applications for ESAS accounts from parties that are not registered banks. This is partially as a result of new forms of financial institutions arising which are limited by having to access payment systems through traditional registered banks as well as other deposit-taking institutions seeking to bypass the agency banking relationship or to access deposits with interest rates at the official cash rate.
In May 2022, the RBNZ determined that no new applications would be processed until it had consulted on and developed new access criteria. In June 2023, the RBNZ consulted on issues it would need to consider in opening up access to ESAS as well as a risk assessment framework it would use to assess the risks of opening up ESAS access. The RBNZ has published key themes from this consultation including, among others, the role of ESAS in supporting innovation, calls for wider use of ESAS, objectives for how ESAS should align to wider payments vision and proper consideration that is needed for the impacts of competition in widening up ESAS access.
The RBNZ has released a second round of consultation setting out the motivations and policy intent underlying the review and the detailed access criteria RBNZ is proposing to apply in relation to ESAS – which is intended to allow for a greater range of participants and types of access to ESAS while ensuring that this systemically important infrastructure maintains a high level of integrity.
Proposed access policy settings and criteria
The Consultation sets out the proposed access policy settings, which is split into three components: the access criteria, application pack and risk assessment framework. The main subject of the Consultation is the access criteria, which can be divided into three high level requirements:
- Granting an ESAS account will support one of the stated purposes of ESAS
- The account is to be used for a business activity that is of net benefit to New Zealand
- The applicant has an acceptable risk profile within the RBNZ’s risk appetite.
The draft access criteria for ESAS applications are set out in Appendix 1 to the Consultation, with the purpose being to set out criteria for participation in ESAS and to allow an applicant to apply for and, if the applicant satisfies all the access criteria, be granted, the right to participate in ESAS. There are five criteria that RBNZ considers: appropriate business activity, Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) compliance, prudential and governance, operational, and ESAS terms and conditions enforceability criteria for overseas applicants. We have expanded on these access criteria below.
Criteria one - Business activity criteria
An applicant will satisfy the business activity criteria if it is:
- A licensed deposit taker – meaning a registered bank, licensed non-bank deposit taker or a licensed deposit taker under the Deposit Takers Act 2023 once the relevant licencing provisions under that Act are in force (or overseas equivalent regulated in its home jurisdiction)
- Operating a designated FMI under the FMI Act or a clearing house of a licensed market (or overseas equivalent regulated in its home jurisdiction)
- Carrying on business directly settling payments on behalf of third parties in New Zealand dollars (ie payment services) – entities eligible through this business activity will not automatically be eligible for OCR on overnight balances held in their accounts
- Active in one or more New Zealand dollar wholesale financial markets that are important for implementing monetary policy which include but are not limited to domestic money markets such as the secured and unsecured cash market, and NZ dollar/US dollar FX swap market – entities eligible through this criterion must be prudentially regulated in New Zealand or an overseas equivalent regime; or
- Carrying on business that is assessed as net beneficial to New Zealand – criteria for this include whether access will enhance the soundness and efficiency of the financial system, contribute to economic growth or productivity of the New Zealand economy, enhance the wellbeing of New Zealanders (such as by promoting financial inclusion) and otherwise be net beneficial to New Zealand.
Criteria two - AML/CFT compliance criteria
An applicant satisfies the AML/CFT compliance criteria if the applicant is a reporting entity under the AML/CFT Act and provides a compliance history demonstrating its compliance, risk management and overall prudence in countering financial crime under the AML/CFT Act (there are separate criteria for overseas entities not subject to the AML/CFT Act, but these entities must provide evidence that they are subject to equivalent AML/CFT requirements in their home jurisdiction).
Criteria three - Prudential and governance criteria
Licensed deposit takers (registered banks, non-bank deposit takers and licensed deposit takers under the Deposit Takers Act 2023 once the licencing provisions come into force) and designated FMIs (under the FMI Act) are deemed to meet these criteria. Overseas deposit takers or FMIs must satisfy the RBNZ as to the law and regulatory requirements, prudential supervision and licensing status applying to the applicant in their home jurisdiction.
Other applicants are required to satisfy criteria in relation to creditworthiness (credit ratings or other financial support), risk management (documented risk management systems, frameworks and policies), good standing (fit and proper/probity requirements) and governance and ownership (independent board arrangements, documented governance frameworks and suitable directors and senior managers).
Criteria four - Operational criteria
An applicant satisfies the operational criteria if the applicant has established policies, procedures and processes in place in relation to operational and reliability risks, incident management, operational capacity, physical and information security policies and business continuity/disaster recovery plans.
Criteria five - ESAS terms and conditions enforceability criteria for overseas applicants
An overseas applicant must provide independent legal advice confirming the enforceability of the ESAS terms and conditions and that there is no impediment to the applicant's ability to meet its obligations under the ESAS terms and conditions.
Applications and granting of access
The proposed access criteria also provide for procedural requirements for and decision making on applications, the ability for RBNZ to impose additional requirements, when an applicant becomes an account holder and the ability for RBNZ to add, remove or change criteria. In addition, applicants will pay application fees and ongoing participation fees (which the RBNZ is currently reviewing).
Our view
Overall, the access review and proposed criteria are a positive development and consistent with the objectives of transparency, flexibility, innovation and competition, while balancing the critical resilience and reliability requirements for ESAS. However, the criteria afford a certain level of discretion to the RBNZ so the test will ultimately be in its application.
It is pleasing to see that, at this stage of the consultation, there appears to be the intention to open access to ESAS to support:
- Prudentially regulated institutions holding deposits directly in ESAS accounts that are remunerated at OCR. Some first round submitters advocated that this has the potential to increase deposit remuneration, support strong liquidity (ESAS accounts are high quality liquid assets), enhance competition in the deposit-taking sector and facilitate RBNZ monetary policy implementation
- Innovation and competition in payments by allowing a broader range of participants to settle with each other directly. First round submitters suggested this disintermediation could enhance efficiencies and competition and support offering of innovative payments products that are not reliant on existing participant product offerings.
In addition, the establishment of clear access criteria, with regulated entities being deemed to meet some criteria, should support greater transparency and reduce costs involved in obtaining ESAS access for a greater range of participants.
Next steps
Following the closing of the Consultation on Monday, 18 November 2024, the RBNZ will review and incorporate feedback into the access criteria, as well as apply feedback to supporting guidance and implementation of the access policy. The RBNZ aims to finalise the access criteria and open applications to ESAS from mid-2025.
If you believe your business would benefit from access to an ESAS account, we recommend you familiarise yourself with the proposed access criteria and consider how it would apply to your business. If you wish to discuss any aspect of the Consultation, including how it may impact your business and whether to make a submission, please get in touch with our financial services regulation team.
This article was co-authored by Andrew Suggate (senior associate), Emma Geard (senior associate), Nicole Tan (solicitor) and Thomas Carr (solicitor).
